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185: How to avoid creating trading strategies that degrade quickly - Timothy Masters
Better System Trader
Permutation Tests in Trading System Development
When we develop a trading system, we walk a fine line in regard to the power of our trading system. Markets are very noisy; this one dealt by these huge, huge bits of noise. If our trading system is too weak, it's not going to see those market patterns that are hidden in there and it'll be worthless. But on the other hand, if our system is too powerful, excuse me, it's going to start thinking that noise is legitimate patterns. That happening is generally called overfitting.
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