Tricks of pseudo Trading System Developers
Catch the thief before he catches you.
*Ok, I warn you that this section will not give you anything, I write it exclusively for SEO positioning and I don't even know if it works.
I don't waste much time on this, if you want more garbage you can find all you want on the Internet. Perhaps you are new in this town, or maybe you got lost...
In any case, I hope you are here for the code and not for western movies.
Introduction
In the trading world, the appearance of success can be deceptive. Often, strategies that seem foolproof at first glance hide traps and biases that distort reality. Understanding how data is manipulated to select favorable periods, exclude transaction costs, and omit open trades is crucial. This analysis unveils the practices that artificially inflate results, providing a more accurate view of trading strategy performance.
1. Selection of Favorable Periods
The selection of favorable periods is a common practice that involves choosing specific time intervals where a trading strategy shows exceptionally good performance. This technique can lead to misleading conclusions, as it ignores how the strategy would have performed under different or less ideal market conditions. For example, if a strategy excels during a bull market, it might not be effective in a bear market.
Presenting only the periods where the strategy was successful creates a biased perception of its long-term effectiveness, overlooking any negative or average performance at other times.
2. Exclusion of Transaction Costs
Transaction costs, such as commissions and spreads, can significantly affect the profitability of a trading strategy. Excluding these costs from the results presented artificially inflates the profitability of the strategy.
Transaction costs can only be excluded if the average profits per transaction are high enough to support them and be insignificant as in all the strategies I have published so far.
AvgTrade 422.67$
AvgTrade 461$
A strategy that shows a small return per trade may appear profitable until you consider the transaction costs, which can eat into profits or even turn them into losses.
3. Ignoring Open Trades
Ignoring open trades with losses can provide an incomplete picture of a strategy’s performance. This approach counts only closed trades, possibly portraying a strategy as profitable when, in reality, potential losses from open positions could outweigh the realized gains. Not considering these open trades omits a crucial part of the risk equation and overestimates the strategy's effectiveness.
Have you seen those strategies with ascending green lines? It's just what they do, they don't tell you what happened during the operation.
It is not a different trap than presenting weekly or monthly DrawDown statistics, they are literally laughing at you and you could multiply it by 2 or 3 or who knows.
When I present a trading curve you see what happened while the trade was open so you can see what happened and when.
You see the difference?
4. Vague Predictions
Vague predictions are those that are broad enough to be interpreted in different ways, depending on market outcomes. These claims do not commit to a specific result, allowing strategists to claim success under a variety of scenarios.
For example, a strategy might claim that "the market will show significant volatility," a prediction that can be validated with sharp moves up or down, allowing for a positive interpretation regardless of the outcome. This ambiguity protects the strategy from direct criticism, as its generic prediction can be considered "correct" in multiple contexts.
This is one of the things I call western stories. They are useless, you cannot find any use for them and they cannot prove anything. Code, no stories.
5. Focus on Winning Trades
Focusing exclusively on winning trades while ignoring the losers is a common tactic to highlight the success of a strategy. This approach creates a distorted image of performance, as it presents a selective view of the results. By showcasing only the successful transactions, a strategy can appear more profitable than it actually is. However, an honest and complete evaluation should include all trades, both winning and losing, to provide an accurate representation of the strategy’s profitability.
It is almost the same as showing only the winning periods, many would justify it with how the market changed and things like that. I don't even look at a strategy that doesn't have a long backtest with many operations.
6. Strategy Survival
Survivorship bias refers to the tendency to consider only the strategies that have "survived" or been successful over time, ignoring those that have failed. This bias can lead to an overestimation of the overall success of the available strategies, as only those that remain in the market are analyzed.
Strategies that were not successful and disappeared are not included in the analysis, providing an incomplete and overly optimistic view of the trading environment. It is crucial to evaluate both successful and failed strategies to get a complete picture of the effectiveness and risks of trading.
Systems making machines, you don't need to know how to program, you don't need anything, just press the button. There are a million, choose the best.
Are you wondering why it doesn't work?
7. Statistical Manipulation
Statistical manipulation involves using mathematical techniques to present the results of a strategy in a way that appears more favorable than it actually is. This can include selecting scales on charts to exaggerate positive returns, changing time frames to highlight specific outcomes, or using statistical measures that do not adequately reflect risk or volatility. These methods can give the impression that a strategy is more effective or secure than the full evidence suggests.
Overfit, overfit, overfit.... I will talk to you about it in a next article.
Final words
It is important that you know and continue investigating these concepts. Since I have set up this Substack I have come into contact with some things that I did not use until now such as Twitter or other charlatan financial blogs and I am terrified. Not because there are thieves or smoke sellers, but because people listen to them and what's worse, they give them their money!!
The city has been filled with bandits and now we are all Quants, although some don't even know basic statistics.
Don't trust anyone, not me either. But at least I'm cheap and what was previously published is... if you prefer to wait to see if they worked, it will only cost you 3 or 4 times more.
Be careful out there.
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