Determining Optimal Trading Rules without Backtesting

Peter Carr and Marcos Lopez de Prado

Papers from arXiv.org

Abstract: Calibrating a trading rule using a historical simulation (also called backtest) contributes to backtest overfitting, which in turn leads to underperformance. In this paper we propose a procedure for determining the optimal trading rule (OTR) without running alternative model configurations through a backtest engine. We present empirical evidence of the existence of such optimal solutions for the case of prices following a discrete Ornstein-Uhlenbeck process, and show how they can be computed numerically. Although we do not derive a closed-form solution for the calculation of OTRs, we conjecture its existence on the basis of the empirical evidence presented.

Date: 2014-08, Revised 2014-09
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Citations: View citations in EconPapers (2)

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