One approach I’ve seen traders take when developing a trading strategy is to use nice round numbers for their rules.
I understand the thought process, and I used to do this, but I’ve realized over the years that it accomplishes nothing.
Here’s an example. Let’s say you’re trading a gap strategy. You run a backtest and find that the strategy is profitable above, say, a 5.8% gap.
A lot of traders will take that 5.8 number and round it to 6% – because they believe that using 5.8 “would be curve-fitting.”
They apply the round number, thinking they’ve cleverly avoided curve-fitting by doing so.
It might make you feel a little better, but the market doesn’t care that you’ve used that round number versus the more exact number you’ve proven is optimal.
It’s not a serious mistake, but you can skip the song and dance of using a round number because it’s not accomplishing anything.
Now think about a year from now when you’re going back and looking at your strategy rules.
You see 5.8. That conveys a level of precision that serves as a reminder that you thoughtfully chose it rather than pulled it out of thin air. If you see 6, then unless you’ve documented your process really well, you’re not going to remember exactly why you chose it.
Speaking of round numbers, tomorrow I’ll share something I often see in traders’ strategies that is a sure sign it can be improved.
-Dave
