Is Using a Filter Evil?

Aug. 21, 2024

In our last Newsletter, we wondered if optimizing was “evil”.

Some very smart and experienced traders tell us it is.

Granted, wild, unsubstantiated optimizing is, indeed, a terrible idea.

Trying endlessly to turn something random and thoughtless into something profitable on paper is a path to destruction.

But what about small tweaks to something that is already good?

For example, what if you love a certain restaurant but it’s always busy at 7 pm?

Are we allowed to optimize a different eating time?

The restaurant doesn’t turn into a bad restaurant just because we decided to come at a different time.

Similarly, what if we love a strategy but don’t love the length of the drawdowns?

Are we allowed to make a small change that slightly changes the order and frequency of our trades?

Does the strategy turn into a bad strategy just because we entered at a different time?

Again, the obvious answer seems to be no.

Using a small filter on a solid strategy shouldn’t turn profit into failure.

But let’s look at it a different way.

Let’s take our upwardly-biased strategy from the last Newsletter and run it through 700 different filters.

Remember, here’s the curve with no filters:

And here’s a list of the results from trying out 700 different tweaks:

The column with the red arrow pointing at it is Net Profit. (The others after that are Gross Profit, Gross Loss, Total Trades, and % Profitable).

Filter #74 produced over $132k of profit. Woohoo.

Now look down.

All the other tests in the list also produced a lot of profit. In fact, the top 239 filters all produced about the same amount of winning.

It really doesn’t matter much which one we pick.

They all seem to do okay.

Did any of these filters turn losing into winning? No.

Did any of these filters use weird logic? No.

So, will any of these filters make a good strategy turn horrible?

If hundreds of tweaks all work, is choosing one of them evil?

What do you think?

In our next Newsletter, we’ll look at one of those filters and how we did.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.