Thoughts on Optimization?
Vendors love optimization, because it can generate eye popping hypothetical profits which has no connection to real-time trading. I prefer a system to work without optimization. But if I have to do it, I would make sure that the optimization is robust in the following manner: 1. The sample size of data should be large enough to represent real-time market conditions – bull, bear and sideways markets. 2. The look-back period should be as large as possible for the same reasons. 3. The testing of optimizable parameters should be on out of sample data using walk-forward analysis. 4. The Central Limit Theorem says that for a sample to assume the characteristics of the population, the size of sample should be large. The minimum sample size should be around 30. But since an uptrend or downtrend can last for say 50 periods, I would have a minimum sample size of 100 periods making sure that the full market cycle is there (uptrend, downtrend and congestion). 5. The optimizable parameters should b
