Few Rules and Parameters

To achieve success, limit the number of free rules and parameters, especially when working with small data samples. For a given sample size, the fewer the rules or parameters to optimize, the greater the likelihood that a trading system will maintain its performance in out-of-sample tests and real-time trading. Although several dozen parameters may be acceptable when working with several thousand trades taken on 100,000 l-minute bars (about 1 year for the S&P 500 futures), even two or three parameters may be excessive when developing a system using a few years of end-of-day data. If a particular model requires many parameters, then significant effort should be put into assembling a mammoth sample (the legendary Gann supposedly went back over 1,000 years in his study of wheat prices). An alternative that sometimes works is optimizing a trading model on a whole portfolio, using the same rules and parameters across all markets-a technique used extensively in this book.