More rules need more data

2 4 8 12 16 24 32 48 64 96 128 Number of rules

Figure 2.3 Adding rules reduced the number of trades generated over 10 years of Swiss franc data. Note that the horizontal scale is not linear.

Figure 2.4 shows that the profit initially increased as we added more rules. This means that the extra rules first act as filters and elimi­nate bad trades. As we add even more rules, however, they choke off profits and moreover increase equity curve roughness. Thus, you should be careful to not add dozens of rules.

As stated, this example did not include an initial stop. Hence, as we increase the number of rules, the maximum intraday drawdown should increase because both entries and exits are delayed. You can verify this by using Figure 2.5, page 23.

Calculations for the U.S. bond market from January 1, 1975, through June 30, 1995, illustrate that the general pattern still holds. Fig­ure 2.6, page 24, shows that as the number of rules increases, the profits decrease. The exact patterns will depend on the test data. Data from other markets confirm that increasing rules decreases profits.

Thus, adding rules does not produce endless benefits. Not only do you need more data, but the rising complexity may lead to worsening system performance. A complex system with many rules merely captures

22 Principles of Trading System Design

Increasing rules first filter, then choke profits

S 8)

2 4 8 12 16 24 32 48 64 96 128 Number of rules

Figure 2.4 Adding rules increased profits moderately on 10-years of Swiss franc continuous contracts from January 1, 1985, through December 31, 1994. Note that the horizontal scale is not linear.

nuances within the test data, but these patterns may never repeat. Hence, relatively simple systems are likely to perform better in the future.