System's optimal complexity

Discussion in 'Trading Systems and Strategies' started by huangwh88, Aug 7, 2016.

  1. huangwh88

    huangwh88 Newbie

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    Hello fellow traders,

    I just finished 'Trading Systems: A New Approach to System Development and Portfolio Optimisation' by Tomasini and Jaekle. They mention that every system has a point at which optimal complexity is reached, meaning that further in-sample optimization will not lead to improvements in out-of-sample testing.
    So my question is, at which point during development must we determine this optimal point?

    I suppose it should be done prior to WFA. Lets say I have 5 parameters that can be optimized, and 10 years of historical data. I use the first 8 years for optimization, with the last 2 used for out of sample testing. After this I realize that the point of optimal complexity is reached after 3 parameters are optimized.

    So with these 3 parameters, I proceed to do WFA, leaving the last 2 parameters untouched at all times. Is this the correct approach?
     
  2. Enivid

    Enivid Administrator Staff Member

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    I don't think so. I would prefer optimizing all 5 parameters but, perhaps, with lower number of data points to reduce the data-mining bias.
     

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