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RESEARCH PRODUCT

Testing Profitability of Technical Trading Rules

Valeriy Zakamulin

subject

EstimationLuckOperations researchProcess (engineering)Computer sciencemedia_common.quotation_subjectTechnical analysisProfitability indexTrading strategymedia_commonTest (assessment)

description

Technical traders typically rely on back-testing which is defined as the process of testing a trading strategy using relevant historical data. Back-testing usually involves “data mining” which denotes the practice of finding a profitable trading strategy by extensive search through a vast number of alternative strategies. This chapter explains that the data-mining procedure tends to find a strategy which performance benefited most from luck. As a result, the performance of the best strategy in a back test is upward biased. This fact motivates that any back-test must be combined with a data-mining correction procedure that adjusts downward the estimated performance. Another straightforward method of the estimation of true performance of a trading strategy is to employ a validation procedure; this method is called forward-testing.

yearjournalcountryeditionlanguage
2017-01-01
https://doi.org/10.1007/978-3-319-60970-6_8