Way of the turtle


The Basis of Predictive Value


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Way of the turtle the secret methods of legendary traders PDFDrive

The Basis of Predictive Value
A historical test has predictive value to the extent that it shows per-
formance that a trader is likely to encounter in the future. The
more the future is like the past, the more future trading results will
be similar to the results of historical simulation. A big problem with
using historical testing as a means of system analysis is that the
future will never be exactly like the past. To the extent that a sys-
tem captures its profits from the effects of unchanging human
behavioral characteristics that are reflected in the market, the past
offers a reasonable approximation of the future, though never an
168

Way of the Turtle


MAR Ratio as Exit Threshold Varies
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Exit Threshold
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Figure 11-3
Change in MAR Ratio as the Exit Threshold Varies
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169



exact one. The historical results of a test run with all optimized
parameters represent a very specific set of trades: those trades which
would have resulted if the system had been traded with the very
best parameters. The corresponding simulation results represent a
best-case view of the past. 
One should expect to get these results in actual trading if the
future corresponds exactly to the past, but that will never happen!
Now consider the graphs displayed in the figures throughout this
chapter: Each graph has a shape like the top of a mountain with a
peak value. One might represent a given parameter with the graph
shown in Figure 11-4.
If the value at point A represents a typical nonoptimized param-
eter value and the value at point B represents an optimized param-
eter, I argue that B represents a better parameter value to trade but
one where the future actual trading results probably will be worse
than that indicated by historical tests. 
Parameter A is the worse parameter to trade but the one with
better predictive value because if the system is traded at that value,

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