Let me demonstrate the correct way versus the wrong way. Let’s say I’ve got specific rules which might be a bit technical but doable. One thing we do in technical trading is moving averages which is you take the price today, yesterday and the day before, you add them up, and take the average. If the price today is above that average, then it’s probably trending up. If the price is below the average, it’s probably trending down, it’s the simplest example of a technical indicator. You can have lots of different indicators in your system.

Let’s say I develop a set of rules and keep adding many different indicators until I eliminate all the bad trades in the past and the backtest looks excellent. And in order to do that, I’ve added 20 different rules, and then I’ve varied the numbers in all of the various rules to find the one combination that worked amazingly well in the past. Do you think that would work in the future? No, because I’ve added so much complexity and I fine-tuned it so much to those exact conditions in the past to force the backtest to look good, that complexity won’t be able to predict the future. It won’t be able to extract profit in the future predictably.

Another example let’s say I have two or three rules, and those rules work. Whether I use a 200, 150 or a 300-day average, it doesn’t matter. It’s all profitable in the past. And, if I use a 50, 100 or a 40-day breakout, they’re all profitable. Those rules are stable. I haven’t fine-tuned them to make the past look good. If I have a much broader, more general set of rules, it will work no matter what parameter values I use. That is, then, more likely to make money in the future.

The difference is that we need elegant simplicity that works in a very broad sense rather than ultra-complex specifics that work only under precise conditions. Then we can make money in real-time trading.

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Adrian Reid Founder and CEO
Adrian is a full-time private trader based in Australia and also the Founder and Trading Coach at Enlightened Stock Trading, which focuses on educating and supporting traders on their journey to profitable systems trading. Following his successful adoption of systematic trading which generated him hundreds of thousands of dollars a year using just 30 minutes a day to manage his system trading workflow, Adrian made the easy decision to leave his professional work in the corporate world in 2012. Adrian trades long/short across US, Australian and international stock markets and the cryptocurrency markets. His trading systems are now fully automated and have consistently outperformed international share markets with dramatically reduced risk over the past 20+ years. Adrian focuses on building portfolios of profitable, stable and robust long term trading systems to beat market returns with high risk adjusted returns. Adrian teaches traders from all over the world how to get profitable, confident and consistent by trading systematically and backtesting their own trading systems. He helps profitable traders grow and smooth returns by implementing a portfolio of trading systems to make money from different markets and market conditions.