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77 more harm than good. Because market behavior changes over time, your indicators should be robust enough to stand the test of time. • Test your system on at least 5,000 bars of data. A good rule of thumb is 1,000 bars of data per adjustable parameter. Reject any system whose test results produced less than a statistically significant number of trades, typically 100.
Part IV Advanced Indicators and Forecasting You have seen how to apply indicators, enter and exit the market, test and evaluate your systems, select the proper time frames, diversify, become focused and handle stress. Now you are ready for even more exciting and potentially rewarding techniques. Much of the classical view of market behavior resulted from the mathematical tools available decades ago and has remained nearly constant ever since. However, the rush of newly available technologies is allowing individuals and institutions to pry open and exploit virgin inefficiencies in the market. These new technologies include fuzzy logic, neural networks, genetic algorithms, and data mining. The authors in Part IV will guide you through the fundamental issues inherent in advanced modeling technologies. Chapter 14 begins this discussion with the principles of advanced system development, including data collection and system complexity. The power of intermarket analysis is also illustrated with a simple, yet effective, trading strategy. Since many of the worlds traders are still using incorrect assumptions, you can make a profit by arbitraging the difference between systems that use correct and incorrect assumptions. Chapter 15 compares the classical and modern ideas about market action, and underscores the importance of working with correct assumptions about market behavior.
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