How to Optimize the Parameters of Your Trading Strategies

How to Optimize the Parameters of Your Trading Strategies

Trading involves active participation in the financial market for the exchange of goods and services in return for money. The success of trading depends upon the trader’s ability to get profit with time.

Understanding Trading Strategies

A trading strategy is basically a process of buying and selling stocks in the market based on several rules that are used to make trading decisions. Research and understand the historical market behavior by taking several trading concepts, best ideas, and observations and implement them into a trading system to create a trading strategy.

Trade planning is a process to develop methods such as the exchange of bonds, stocks, and other types of investments. When you place a trade, you work with a broker and identify and manage the trade costs including commission, spreads, and fees. Once it is done, trading positions are managed and monitored by adjusting or closing them.

Developing a Trading Strategy

There are several types of trading strategies and are largely based upon technicals or fundamentals. One of the most common risks is that both depend on measurable information that can be used to backtest for accuracy purposes.

Technical trading strategies- Technical indicators are used to develop trading signals. Technical traders believe that all the information related to security is included in its price.

Fundamental trading strategies- It takes several fundamental factors into account. For example- Investors use a set of screening criteria to develop a lot of varied opportunities. These criteria are created by analyzing several factors like profitability and revenue growth.

Quantitative Trading Strategy- This strategy has gained popularity in recent times. A quantitative trading strategy is somewhat similar to technical trading and uses stock-related information to make any purchase or sale decision.

Advantages of Trading Strategies

Trading strategies can be developed using several methods-

  • Automated trading
  • Visual development
  • Programming

Trading strategies can be implemented by using automated trading or discretionary trading which demands both discipline and skill. It has the capability of automating a part or all of your investment portfolio. A computer trading model can be adjusted for both the trading styles- aggressive and conservative.

Optimization Process

The process of optimization is done to update the trading system in order to make it effective. Strategy optimization includes optimum parameters needed for predefined criteria. Testing several strategy input values, optimization goes for values that correspond to the ideal strategy performance based on researched historic data available. It results in traders receiving several possible input combinations to go for ones that result in a good performance.

For developing a useful algorithm, the parameters should be best optimized based on historical data. However, the process of parameter optimization is a time taking task as it includes large search space. Using several frameworks, the optimization runtime can be cut down.

Once a rule-based strategy is optimized, it performs better in terms of stability compared to ones whose parameters are preset, making a huge profit. The optimization space of a trading strategy is complex, it needs strategy development for better efficiency. The algorithm used continues by repeating the steps for successive generations where each generation creates a new population of parameters. The process continues until

  1. Proper evaluation of a predetermined number of generations.
  2. You get a perfect solution to it.
  3. Significant improvement in population fitness.

Performance Analysis

To check the total profitability level, we need to calculate profit & loss of a current length of price history.

  • Short-term strategies are tested on the basis of 1 or 2 years of data.
  • Intermediate-term strategies are tested on the basis of 2 to 4 years of data.
  • Long-term strategies are tested on the basis of 4 to 8 years of data.

These are few guidelines with possible variances in the given time windows. In the beginning phase of testing, the performance strategy should always be mildly profitable as an unusual loss is considered as a preliminary warning sign.

There are several historical simulations that are being made and the aim is to get a quick idea of how robust the trading system is. We can not conclude with this testing but can provide some of valuable insights about the strategy. It serves as a strong indication of a robust system if the strategy performs well in different types of markets. And, if the strategy does not perform well, it clearly allows you to abandon the strategy.

The more the number of variable sets which develop profitable historical simulations the more the chances of being statistically significant. By optimizing your online trading account with several trading strategies, you can gain maximum profits from your investments.

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