CHAPTER 5

Measuring Trading System Performance and System Optimization

Before you can design a good trading strategy, you must first know what one is. The validity of a strategy is defined by its trading performance. In this chapter, we cover the key performance statistics that separate the good strategies from the bad. Today, with the use of TradeStation, EasyLanguage, and back-adjusted data, we can test an infinite number of different strategies on thousands of different tradable instruments. Twenty years ago only a handful of people throughout the world had this power. Power can be used or abused. In addition to performance statistics, the concepts of parameter robustness and overoptimization are discussed.

Omega Research's System Writer was one of the first software packages to provide back-testing capabilities and trading-performance analysis. Through the years and a couple of name changes, this software package has evolved. In its latest incarnation, back-testing has become much easier to facilitate, and the number of trading performance statistics has increased tenfold. Unfortunately, throughout the years, one key analysis tool still has not found its way into TradeStation: portfolio analysis. We have the ability to microscopically analyze a trading strategy on a particular market, but we can't analyze the interaction of a strategy on a portfolio of different markets. Sure, we can have multiple tests of a strategy on different markets, but we can't see how trading several ...

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