System Optimization - what is it?

System optimization is a tricky subject to discuss because it introduces the concept of curve fitting – which is the worst sin a commodity trader can commit.

Some system traders refuse to use the phrase because it represents all the things they do not believe in.

A trader must ask himself what he is trying to do when he ‘optimizes’ his system. If he is trying to find the parameter settings that produce the best results with a view to using these in his live trading, then he is fitting the system to the test data.

That is curve fitting and it is the wrong thing to do because the same situations contained in the historical test data will not occur again. So there is no reason to expect that these chosen settings are good ones to use.

In fact, it is very likely that some of the optimized settings will be connected with what are known as ‘spikes’ in the price data – where there has been a sudden price movement due to a political or economic event – or the fear of some calamity that may have lasted for a short time.

These spikes in the price data will usually cause your system to produce a large profit or loss that it will deal with more or less well. But whatever the effect, it should not be allowed to have any influence over your chosen parameter settings.

Systems traders do not optimize systems because they know that past events do not recur. When they are choosing parameter settings they are seeking values that appear to produce good results but which are not out of the ordinary.

 

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