Now that the trading strategy has passed the multimarket and multi-period test, we know that the strategy is worthy of further development. The next stage in this development is the optimization of the trading strategy. The overall structure of the optimization process closely parallels that of the previous round of testing. There is one very important difference, however, in that the trading strategy is now taken through the actual optimization process.
The New Oxford American Dictionary provides the following definition of optimize: “To make the best or most effective use of.”
According to this definition, then, to optimize a trading strategy is to make the most effective use of it. How does optimization accomplish this? The optimization process does so by the empirical examination and evaluation of all potential strategy parameter candidates. During the optimization process, a historical simulation will be calculated for a sufficient number of different values for the key strategy parameters that will have the most impact.
There are a number of different and valid terms that are used to describe the optimization process: the test batch, test run, variable scan, the estimation process, and so on.
The word optimization will mean the selection of the most robust set of parameters for a trading strategy. Furthermore, optimization is the identification and validation of those strategy parameters that are best capable of generating peak trading performance ...