Parameter Optimization by Roger Altman, Ph.D.
Optimizing the parameters of mechanical trading systems to improve performance is a common technique, but does such a procedure improve system profitability? Is there evidence that optimization will lead us to parameters that yield at least better than average performance?
Any system has three components:
The unit of price or time change—also known as gang size —within which price movements will be compared. In bar charts, for example, time is stipulated so that price is free to vary to any value. Daily, weekly and monthly bar charts are the most common examples. Point and figure charts, however, require price changes to be stipulated so that time is free to vary to any value. Price or time change is a primary parameter because it is not inherently related to any particular trading system.
-The number of time or price units, which are taken into account in a trading system. Examples are the
nine-day Relative Strength Index (RSI), the 14-month stochastic or the 200-day moving average. Since
this decision should be made before a trading system is chosen, the number in question is also referred
to as a primary parameter.
-Your trading plan. A trading plan that is used to manipulate price and related data is a "system."