LimitedHistory

The amount of historical data for any financial instrument is limited. Only so much history has passed and once all available data has been applied to a trading system test, no more testing can be performed. This problem is encountered by serious system traders, and is particularly frustrating for those that focus on few or only one instrument. Rigorous system testing should involve the application of a validation data set - a set of historical data that the trading system has never encountered before. This is superior to the Walk-forward testing technique, as there can be no curve fitting. This is because, by definition, there is no curve to fit to if the system optimisation process has not experienced the validation data set. This means that your system cannot fail as a result of being optimised to invalid data, because each validation data set is unique. Walk-forward testing requires that the available data be partitioned and applied to the system and because the actual historical data is limited in date range, each segment will contain an even smaller date range. Hence system indicators relying on long term trends will not have sufficient data to become active in the test range. If unlimited data can be applied, this problem is also alleviated.