Optimizing trading strategies without overfitting

By Ernest Chan and Ray Ng   Optimizing the parameters of a trading strategy via backtesting has one major problem: there are typically not enough historical trades to achieve statistical significance. Whatever optimal parameters one found are likely to suffer from data snooping bias, and there may be nothing optimal about them in the out-of-sample period. That's why parameter optimization of trading strategies often adds no value. On the other hand, optimizing the parameters of [...]