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Aaron Trading designs and rigorously tests its forex trading models applying out-of-sample walk forward financial engineering principles utilizing back-adjusted continuous data. These procedures are applied to avoid the fatal dangers of curve fitting and over optimization. Usually, these two reasons are the primary culprit for the failure of forex trading systems when applied to actual forex trading. Furthermore, we also utilize additional statistical measures in an attempt to design extremely stable and robust forex trading systems.
Aaron Trading utilizes these techniques at the core foundation of its forex trading system engineering, testing and implementation for the following reasons:
If given plenty of optimization and curve fitting, an individual can implement almost any trading principle or system to a given forex market and make it appear profitable. However, applying this approach, will normally produce a forex trading system that trades the past well, but is subject to fail overwhelmingly in the future.
The out-of-sample walk forward approach represents a more “real world” trading simulation of the way a forex system is applied in real-time. Additionally, the out-of-sample approach provides answers to the following essential questions.
- Will a trading model continue its profitability after optimization?
- What impact will fluctuations in trend and volatility dictate on future performance?
- Is a trading system extrapolating random forex events or something that has statistical value?
Answering the above questions offers the following benefits:
- It verifies the forward-trading ability of a forex model, i.e. how versatile is the system to changes in market trend and volatility.
- It identifies a system that has potentially been curve fitted or improperly optimized. A model that displays profitably over a large number of walk-forward tests is most likely to be successful within future applications because of its greater statistical validity.
- It supplies a more dynamic measure of the rate of post-optimization profit and risk. Walk forward approaches to model creation provide a statistical profile of multiple in sample and out-of-sample optimizations periods. Additionally, because it is based on a considerably larger sample of forex data it exhibits significantly greater statistical soundness. Furthermore, it also allows a precise comparison of measurements of profitability between rates of out-of-sample versus in-sample trading.
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