Stocks & Commodities V. 34:05 (18–21, 31): Optimizing Your Strategies by Sunny J. Harris

Optimizing Your Strategies by Sunny J. Harris

When you come up with a new trading idea, you can develop it into a strategy. Then you backtest it and try to optimize it for the best variables and parameters. How do you go about doing that, and how do you get the best financial outcome from this process? Here, we’ll cover how to optimize a strategy and how to evaluate the potential profitability of it.

As a consultant, I have often been asked to optimize clients’ indicators for the “best fit.” Let’s say, for simplicity, that the indicator is a simple moving average (SMA). When asking for an optimization of an indicator, the client really wants the best financial outcome, not the best average to fit the data. Initially, they don’t know to ask for what they really want. Most beginners need to first acquire some of the language we use as seasoned traders and coding veterans.

The true, mathematical best fit for the data would be a linear regression curve fit (LRCF), which is not necessarily the best profit potential. It becomes a question of whether you want the best mathematical equation that would approximate the data, or the best profit potential...