A Method For Optimizing Parameters

Most trading systems own got a issue of parameters embedded, parameters such equally the lookback period, the entry in addition to perish thresholds, in addition to then on. Readers of my weblog (for e.g., here in addition to here) in addition to my book would know my persuasion on parameter optimization: I am no big fan of it. This is because I believe fiscal fourth dimension serial is likewise non-stationary to permit i to enjoin what was optimal inwards the backtest is necessarily optimal inwards the future. Most traders I know would rather merchandise a strategy that is insensitive to modest changes inwards parameters, or alternatively, a "parameterless" strategy that is effectively an average of models amongst dissimilar parameters.

That existence said, if you lot tin solely merchandise i model amongst i specific fix of parameters, it is rational to inquire how i tin choice the best (optimal) fix of parameters. Many trading models own got a adept issue of parameters, in addition to it is quite onerous to detect the optimal values of all these parameters simultaneously. Recently, Ron Schoenberg published an article inwards the Futures Magazine that details a agency to achieve this amongst simply a tiny sum of figurer power.

The fundamental technique that Ron uses is cubic polynomial tally of the P&L surface equally a constituent of the parameters. Ron uses the VIX RSI strategy inwards Larry Connors' majority "Short Term Trading Strategies That Work" equally an example. This strategy has five parameters to hold upwards optimized, but Ron solely needs to compute the P&L for 62 dissimilar sets of parameters, in addition to the whole physical care for solely takes 58 seconds.

Although Ron has confirmed that nigh of the parameters that Connors picked are about optimal, he did detect a few surprises: namely, that RSI of menses three or iv is significantly to a greater extent than profitable than the ii that Connors used, at to the lowest degree inwards the backtest period.

Now, for a truthful essay out of this optimization, it would hold upwards helpful if Ron performed this optimization withholding some out-of-sample data, in addition to run into if these parameters are notwithstanding optimal inwards that withheld information set. Since he didn't produce that, nosotros demand to hold off for some other yr to detect out ourselves!