When the system fails to hold up in the future (or on out-of-sample data), the optimization process is pejoratively called curve-fitting. However, there is good curve-fitting and bad curve-fitting.
Curve-fitting
Curve-fitting occurs when rules are added to the Key Idea for the specific purpose of eliminating bad trades. Systems that have been 'curve-fit' never hold up in live trading.
Conclusion
What We've Covered ...
Curve-Fitting
The process during the development and testing of a mechanized system where rules are created that map every event in the historical data of a security.
Curve-Fitting
Developing complicated rules that map known conditions.
Curve-Fitting
Traders often define a system in terms of a set of parameters and then find the set that maximizes past performance.
Although Elliot noted that some waves had sequences or ratios that roughly corresponded to the Fibonacci sequence, or the golden ratio, or some permutation of these numbers, these relationships were mostly the result of curve-fitting.
 See also: Curve, Trading, Future, Analysis, Market
  
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