TSPE Assumptions - Tutorial Previous  Top  Next

TSPE makes a couple of important assumptions about your input data (profits and losses) which must be accommodated to produce valid results.

Looking at the first assumption, the trading results you want to evaluate must not have been derived through what some technical analysts call "curve fitting." The term "curve fitting" comes from the mathematical procedure whereby one can fit an Nth degree polynomial through N+1 points such that the resulting equation will define a path that exactly visits all N points in a sample. Consider the straight line, which is a first degree (one parameter) equation. Two factors can define a straight line that will always pass through two given points. The straight line includes an origin (A), and a slope (B). An equation using the known factors A and B will always force a straight line through those two given points.

To satisfy the first assumption (requirement), the user should try to avoid any attempt to certify technical trading systems that use extensive repetitive searches of all possibilities to uncover the one best procedure that exactly matches the data. To a great extent, this restriction might remove many alternative schemes. Consequently, TSPE is designed to reverse some of the potentially exaggerated performance through the parameter-count adjustments and small-sample penalties discussed below.

The second assumption is that sample results derived from the trading system are independent. This means the results of each trade have absolutely nothing to do with the results of previous trades. For example, a system that doubles-up your position when certain profits or losses are attained would not be suitable for evaluation with TSPE. This is because the distribution of profits and losses is assumed to be random and inherently defined through the sample.

If your trading record complies with the above assumptions, you have what you need to input your trade-by-trade results. This tutorial example will guide you. If you don't have a suitable trading record, we suggest you develop one or ask your system developers for their experience so you can evaluate it with TSPE. Then you'll be ready to launch TSPE.