The Evaluation and Optimization of Trading Strategies, 2nd Edition

INTRODUCTION

Why a Second Edition?

When Perry Kaufman first asked me to write this book in 1991, the business of trading, the technology of computing, and the climate for trading systems, also known as mechanical trading, and as it is now often called, algorithmic trading, could not have been more different from what it is today. Nevertheless, the first edition has been extremely well received over the years. Consequently, the idea of writing this second edition of DTOTS—as I always think of it—has been daunting for a number of reasons, not the least of which is the risky business of messing with success. You know, “If it ain’t broke, . . .”

For now, suffice it to say, that I have been asked often and again, “When are you going to update DTOTS?” Well, we both now know the answer to that question. And, I have often been asked, “When are you going to come out with another book?” Stay tuned for the answer to that one.

I would like to make one thing perfectly clear from the outset—and also forewarn anyone who did not like the first edition from buying this edition—I still believe that the method that I created, pioneered, and still use to this day, Walk-Forward Analysis (WFA) to be the only 99 percent foolproof method of optimizing a trading strategy. The only model that I trust that does not use WFA is the model that requires no optimization. And even that is still not a guarantee of future performance because there can be curve-fitting in a nonoptimized trading strategy.

For the ...