New Article: How Not to Fall into Optimization Traps
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Abstract:
Creation of a trading system, first of all, consists in formulation of rules that would open and close a long or a short position. These rules usually contain some indicators and parameters. If they are changed, the profitability of the trading system will change, too. The question occurs very frequently: Is there any necessity to optimize trading systems or is this just fitting the system to historical data?
This most probably attaches to the fact that different people may mean absolutely different procedures under "optimization of a trading system". So let us define first what optimization is.First, we may understand by "optimization" the selection or creation of a trading system that would solve our problems better than other systems. For example, we are searching for such a system that would make the largest profit on yen/US dollar at the moment. For this, we will choose a system with some fixed parameters from a certain variety of systems. This may be, for instance, a choice made among systems based on different indicators. Let's call this the "first-type optimization".
Second, we can understand by "optimization" the finding of such parameters for the selected trading system that would allow us to obtain the best results. This may be selection of period to calculate the average or period to calculate stochastic structures. Let us call this "second-type optimization".