Design, Testing, and Optimization of Trading Systems is a practical, hands-on guide to setting up, adjusting, and trading mechanical systems that requires no computer or programming skills. This book helps you develop, evaluate, and apply a winning computer trading system that suits your specific needs.
The practical side of testing is the need to know how a set of rules and calculations (a strategy) would have performed had it been traded in the past. Because the formation of most methods comes from a review of past situations (either very specific situations or a generalized concept), it is only natural to want to see whether your perception of what would have happened is correct.
It is perfectly justifiable to back-test your ideas. It would be more unreasonable to trade a strategy without knowing its likelihood of success, your risk exposure, and consequently the amount of capital needed to achieve the desired results.
Philosophically, there is another problem. The power of computers makes it possible to test so many combinations of patterns, rules, and formulas that there is little doubt a seemingly successful strategy will be found. Experience now shows that these solutions do not lead to real trading profits.
The phenomenon, more recently understood as “overfitting,” presents a dilemma for anyone developing a trading program. Bob Pardo addresses this problem directly, offering procedures and clear explanations of the correct solution.
The evaluation of optimization results must also be statistically sound. Presenting and interpreting the results properly is the key to finding the best solutions. The author understands this and shows when the pitfalls lead to unreliable results and market losses, while the correct process gives meaningful answers.
- ON OPTIMIZATION
- TRADING SYSTEM DEVELOPMENT
- TRADING SYSTEM STRUCTURE
- THE RULES OF SIMULATION
- SEARCH AND JUDGMENT
- EXERCISES IN TESTING
- OPTIMIZING THE TRADING SYSTEM
- THE EVALUATION OF PERFORMANCE
- THE MANY FACES OF 0VERFITTING
- THE EVALUATION OF REAL-TIME TRADING