V.14:10 (415-418): The Siren Call of Optimized Trading Systems by Dennis Meyers

V.14:10 (415-418): The Siren Call of Optimized Trading Systems by Dennis Meyers
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The Siren Call Of Optimized Trading Systems by Dennis Meyers, Ph.D.

Today's software for trading systems can take you down some dangerous paths. Here's how to avoid one mistake.

With the advent of today's high-performance desktop computers and software as well as the availability and cheapness of historical data, trading systems are more prevalent than ever. These systems usually hold out the promise, either implicitly or explicitly, of assured trading rewards. The majority of the trading systems being offered to the trader today are presented with hypothetical track records showing the excellent profitability and performance that could have been obtained by using that system.

The parameters for these systems are usually found by the process of optimization. In this context, optimization means that all the parameters of the system are varied until a parameter set is found producing the best performance of the system over some tradable price series. Usually, tens of thousands of parameter sets are examined. The parameter set that gives the best results - that is, shows the most profitability or highest percentage wins - is chosen, and a hypothetical track record is generated using these parameters. Such optimization is also known as curve-fitting.

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