Optimization

Optimization is the process of making a trading system more effective by adjusting the variables used for technical analysis.

Optimization, in order to work, requires that systems constantly adjust to hit a moving target. From changing the quantity of periods used in moving averages to just simply taking out what doesn't work, optimization is an ongoing process.

Trading systems are developed over a long period of time. Once they have been created, there is a period of beta testing and then optimization based on those results. Once the system has been implemented, real world factors will come into play and may highlight issues that weren’t previously detected. Optimization doesn’t just occur when there are issues. Systems can adjust to be optimized based on changing factors in the market or based off recent technological advancements as well. Finding the best possible combination of settings and factors for the system parameters is vital to the success of any system. In fact, to work correctly a system should continue to periodically re-optimize based on current data and real-world factors.

As with most things, there is still potential for even an optimized system to fail. Additionally, a system can become over-optimized. For example, it may have sample sizes or period durations that are too small to be accurate, or too large to provide fine-tuned information. Also, each factor or rule that is applied to the system can take away from the system’s ability to provide accurate information.  

Trading systems can be used by just about anyone. Individual investors and major institutions alike may have systems that they rely on to provide detailed information to help them choose investment strategies. Individuals acting on their own behalf may have rudimentary systems that they have created themselves that may not require technological experience or coding knowledge. There are also trading systems available online that anyone can take advantage of. A Google search for trading systems will result in lists of both free systems and ones that require payment or membership to use.

Institutions will rely on more sophisticated systems. Many will have their own systems designed to be used in house. These systems will be more advanced and offer more options for optimizing than the free ones novice or casual traders can find online.

Whatever system an investor uses, they should use it with the knowledge that data can still report incorrectly, and systems can fail. A trading system is just another tool investors can use when investing; it does not replace the need for critical thinking.