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Parameter

A number in a trading rule that you chose rather than derived, such as a lookback length, a threshold, or a stop distance.

Every parameter is a decision you made from data, and every decision from data can be fitted to noise. Counting them honestly is the start of any robustness work: a 20/100 moving average crossover with a 2 ATR stop and a 5% volatility target has four parameters, not one.

Parameters are not evil; they are unavoidable. The question is whether the result depends on the exact value. A rule that works for lookbacks of 40 to 120 is describing something real; a rule that only works at 63 is describing your sample.

When you count, include the invisible ones: the universe you picked, the start date, the bar size, and the fact that you tested this idea after seeing the last three years of price action.

Related: parameter-sensitivity, parameter-plateau, degrees-of-freedom, overfitting

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A fast and a slow moving average crossingA jagged price line with two smoother average lines through it; the fast average dips below the slow one on the left and cuts back above it in the middle, where a circle marks the crossing.pricefast averageslow averagefast crosses belowfast crosses abovethe slow averageAverages of recent closes; the fast one reacts sooner than the slow one.
Fast and slow moving averages crossing. A moving average is the average of the last few closing prices, redrawn each period. An average over fewer periods turns sooner than one over many, so the two lines cross whenever the recent pace of the market changes.

Educational only, not advice. Spotted an error? Post in Site Feedback.