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traders have just wasted some very valuable time programming, because all they have accomplished is to curve-fit their variables to historical data. While it appears to be an outstanding combination of variables, it is an outstanding combination because it is only looking at the specific data used to perform the permutations. In other words, if they modified the data by changing either the dates used or the contracts, and reperformed the computer optimization study, they would come up with different short-term and long-term moving average values. |
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All traders use optimization studies to one degree or another. It is important to realize that by varying the length of the data used and by using different contracts, the value of your variables will vary. If you do in fact optimize your indicators and trading system, your goal is to find a group of variables that perform equally well on different contracts and different time periods. |
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When you start analyzing the profitability of the various variables, you should automatically discard the variables that generated profits far in excess of any other profitable variables. Why? Suppose that a certain set of variables generated profits of $2000 and the second most profitable set of variables generated profits of $1000, and the third most profitable set of variables generated profits of $950. Then it would be safe to say that the variables that generated the profits of $2000 are so optimized that they are worthless. |
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Your goal whenever you are doing optimization studies is to come up with a set of variables that perform equally well on different commodities, using a wide variety of different data lengths and, perhaps most important, using commodities that are clearly in bull and bear markets. The last point requires a little expansion. Lately there have been some very good computer-based systems that have generated profits. Typically, however, the system is geared only toward a bull market. When the market goes sideways or actually drops, the system loses a lot of money. It is important as you devise your system to look at the widest possible variety of markets, trends, and time frames. |
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When you are developing your methodology, keep in mind that you will be trading in markets dominated by bulls, markets dominated by bears, and markets where everyone is snoozing. You want your trading methodology to reflect this fact. An outstanding methodology will be profitable in all markets, in all time frames, and across all trends. |
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In order to design your computer-based trading methodology (if indeed you decide to use one), you must make a commitment to the time and intellectual power that will be required. Naturally enough, you will need to strengthen the beliefs that empower you, constantly improve your virtues, and annihilate your vices. |
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