Janette: Jack, what are your thoughts on optimization?
Jack: Optimization can have some uses, but I think it often causes more harm than good because it’s so misused. That doesn’t mean that optimization doesn’t have any value. However, if you’re going to evaluate the merits of a strategy based on optimization, then its worse than useless because its going to totally distort the true efficacy of the system. You can test a million parameter sets for a system and some of those will be enormously good. If you’re going to judge how the system performs based on that, you’re going to have a tremendously distorted picture. Optimized results are always going to overstate what a strategy can do. Do not use optimized results in any form for evaluating a system.
The key question, however, is-- will optimized parameter values perform better than randomly selected values in the future? The assumption that they will is by no means a foregone conclusion. There are certain approaches optimization may help tune the strategy to the changing markets, but you can only determine that by testing. You have to be a scientist about it and actually test including optimization and see if it adds anything. Don’t just assume that the optimization on past data tells you anything about the future. That is something that you have to evaluate on a case-by-case basis.
Janette: Thanks Jack, your insights always seem focused on what is really important.
Jack D. Schwager is currently the Managing Member of Market Wizards Funds, L.L.C., in Vineyard Haven, MA. His prior experience includes 22 years as the director of futures research for some of Wall Streets leading firms. Schwager is a frequent seminar speaker and has lectured on a range of analytical topics with particular focus on the characteristics of great traders, technical analysis, and trading system evaluation. He holds a B.A. in Economics from Brooklyn College and an M.A. in Economics from Brown University.
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