Synopses & Reviews
The Wiley Traders Advantage is a new series of concise, highly focused books designed to keep savvy futures, options, stocks, bonds, and commodities traders abreast of the latest, successful strategies and techniques used by the keenest minds in the business. Each title delivers timely, cutting-edge guidance on a key aspect of trading, including trading systems, portfolio management methods, computerized forecasting, and systems optimization. Design, Testing, and Optimization of Trading Systems is designed to help savvy traders to formulate and test trading structures to amplify trading profit and avoid real-time trading issues. This is the first book to offer practical, hands-on guidance for setting up, adjusting, and trading mechanical systems without requiring computer language or programming skills. And its flexible, user-friendly approach can be easily followed regardless of which form of technical analysis youre currently using stochastics, moving averages, chart patterns, RSI, breakout methods, and others. Here, finally, is the systematic, empirical guidance you demand to develop and verify each stage of a profitable trading strategy, from formulation through testing to real-time trading. Armed with the authors battery of easily accomplished testing and optimization techniques many never before published youll design a workable trading strategy, reliably measure its profit potential and risk, then test it to see if it works in real-time trading. Moreover, youll learn how to optimize the strategy over a variety of different markets and time periods, and maintain its peak performance in the face of trends, volatility and liquidity changes, and new trading conditions. To insure testing accuracy, the author identifies the symptoms of overfitting and supplies proven guidelines for avoiding it. Design, Testing, and Optimization of Trading Systems recognizes that different traders have different levels of trading capital, time available, profit requirements, and risk tolerance. Whether youre seeking to enhance your trading profit or make a start at strategy testing, youll find the perfect mix of practical instruction and advice to develop, evaluate, and apply a winning mechanical trading system that suits your exact needs.
Synopsis
A practical, hands-on guide to setting up, adjusting, and trading mechanical systems that requires no computer or programming skills! Heres everything youll need to develop and verify each stage of a profitable trading strategy, from formulation through testing to real-time trading. Armed with the authors battery of easily accomplished testing and optimization techniques many never before published youll design a workable trading strategy, reliably measure its profit potential and risk, and then test it to see if it works in real-time trading. No matter what your level of trading expertise, now you can swiftly isolate and eliminate the causes of trading failure and make the decisions essential to profitable computerized trading. Youll discover:
- The seven major components of mechanical trading strategies and their uses
- When and how to use fast, accurate, and realistic computer simulations to evaluate a strategys trading performance without risking precious capital
- The best ways to tailor a trading strategy to fit the unique personalities of widely different markets
- What to expect from a trading model in real-time trading
- How to judge trading performance with respect to historical testing performance
Design, Testing, and Optimization of Trading Systems helps you develop, evaluate, and apply a winning computer trading system that suits your specific needs.
Synopsis
A newly expanded and updated edition of the trading classic, Design, Testing, and Optimization of Trading Systems
Trading systems expert Robert Pardo is back, and in The Evaluation and Optimization of Trading Strategies, a thoroughly revised and updated edition of his classic text Design, Testing, and Optimization of Trading Systems, he reveals how he has perfected the programming and testing of trading systems using a successful battery of his own time-proven techniques. With this book, Pardo delivers important information to readers, from the design of workable trading strategies to measuring issues like profit and risk. Written in a straightforward and accessible style, this detailed guide presents traders with a way to develop and verify their trading strategy no matter what form they are currently using-stochastics, moving averages, chart patterns, RSI, or breakout methods. Whether a trader is seeking to enhance their profit or just getting started in testing, The Evaluation and Optimization of Trading Strategies offers practical instruction and expert advice on the development, evaluation, and application of winning mechanical trading systems.
Robert Pardo (Kenilworth, IL) is a recognized expert in the design and testing of trading strategies and computerized trading applications. He is founder and President of Pardo Capital Limited, a professional money management firm; Pardo Group Limited, a consulting firm; and Pardo Analytics Limited, a proprietary market analysis services firm.
Synopsis
It would be an understatement to say that the world has changed dramatically in the sixteen years since the first edition of Design, Testing, and Optimization of Trading Systems was published in 1991. With all of the changes in communications, technology, and trading styles, a thorough and comprehensive working knowledge of how to properly design and test strategies has never been more important than it has become in today's extremely competitive markets. Robert Pardo argues that a trading strategy can only be properly evaluated and successfully traded when profit and risk have been measured precisely and accuratelywhich can only be done through computerized testing. In this updated and revised edition of his classic work, Pardo, a professional money manager and renowned expert in the design and testing of trading strategies and computerized trading applications, provides a clear-cut and specific road map for traders who want to transform a trading idea into a tested, verified, properly capitalized, and profitable automated trading strategy.
Pardo shows that the benefits of correct testing and optimization vastly outweigh the effort required to learn and master their proper application, and sets forth in detail the correct way to formulate, test, and evaluate a trading strategy. He explains how to properly optimize a trading strategy, incorporate out-of-sample data in the testing of a strategy, perform Walk-Forward Analysis, develop a trading strategy profile, and judge real-time trading performance with respect to the trading strategy profile developed via historical testing. In addition, he identifies the symptoms of overfitting
optimization that has "gone bad" and resulting in false conclusions and offers guidelines to avoid it.
The trading game has never been as large or as lucrative as it is today. Nor have the markets ever been more efficient than they are today. Yet traders the world over continue to make profits. Why? They have found an edge. For anyone planning to employ algorithmic or mechanical strategies in their trading, this book presents, in a straightforward and accessible style, the edge that you can use to obtain and enjoy the fruits of profitable trading.
Synopsis
Praise For The Evaluation and Optimization of Trading Strategies
SECOND EDITION
"The testing process is key to a profitable trading method and Bob Pardo brings order and sanity to it. He shows the reader how to navigate the minefield of optimization and offers walk-forward testing as a way to change a static system into a dynamic one."
Perry Kaufman author of New Trading Systems and Methods, Fourth Edition
"Will your system work in the future? In this book Bob Pardo shows you exactly how to construct a trading system and then take the most important walk of them allthe walk forward testto find out if your system is really worth trading. Now you can know before you trade!"
Larry Williamsauthor of Trading Stocks &Commodities with the Insiders: Secrets of the COT Report, and Long-Term Secrets to Short-Term Trading
"How to evaluate likely future trading system performance is not just a questionit's the question, and Pardo's 1992 Design, Testing, and Optimization of Trading Systems was a milestone work in the field. Now his approach has been updated and expanded to reflect technological change as well as many insights gained along the way. A must read for anyone who takes trading seriously."
Bruce DeVaultPresident, QuantevoAlgorithmic Trading Development
"Ask serious system developers for their recommended reading list, and Bob Pardo's book is likely to be among the first mentioned. This book is the real deal; a serious work that seeks to teach you what to look for and what to avoid in your quest for workable trading methodologies. Best of all, it helps you achieve the kind of objective, critical thinking necessary for mechanical trading success. Seekers of magical holy grails would be advised to look elsewhere, but for earnest professional trading aspirants, this is a most rewarding read."
Art Collins author of Beating the Financial Futures Market: Combining Small Biases Into Powerful Money Making Strategies
"This book is the definitive book on designing, testing, and using trading systems. There is no better book on the market."
Courtney smith Courtney Smith &Co., Inc.
Synopsis
With all of the changes in communications, technology, and trading styles, a thorough and comprehensive working knowledge of how to properly design and test strategies has never been more important than it has become in today’s extremely competitive markets. That’s why Robert Pardo has created The Evaluation and Optimization of Trading Strategies, Second Edition. For anyone planning to employ algorithmic or mechanical strategies in their trading, this book offers the information you need to properly understand and execute them.
Synopsis
Behavioral decision research has developed considerably over the past 25 years, and now provides important insights into managerial behavior.
Bazerman & Moore’s Judgment in Managerial Decision Making, 7th edition embeds behavioral decision research into the organizational realm by examining judgment in a variety of managerial contexts.
This book includes information that is useful for anyone seeking further information on improving his or her judgment and decision making. Throughout, you’ll find numerous hands-on decision exercises and examples from the author's extensive executive training experience that will help you improve the quality of your managerial judgment.
About the Author
About the author ROBERT PARDO is the founder and President of The Pardo Corporation, one of the worlds leading developers of trading and technical analysis microcomputer software. Beginning with its release of Chartist, in 1983, his firm has continuously updated its software line with such programs as Lightning, Blast, Advanced Chartist, Advanced Trader, and Expert Trader. Mr. Pardo is also a frequent contributor of articles to such magazines as Futures, Technical Analysis of Stocks and Commodities, and Wall Street Micro Investor. About the Series Editor PERRY J. KAUFMAN has over 20 years experience in systems design for trading strategies, hedging, and arbitrage in derivative products. He is the author of five books, including The New Commodity Trading Systems and Methods (Wiley) and numerous articles. A resident of Bermuda, Mr. Kaufman is the Managing Director of Comrand Limited, a research and development firm.
Table of Contents
Foreword.
Preface.
Acknowledgments.
Introduction.
Chapter 1. On Trading Strategies.
Why This Book Was Written.
Who Will Benefit from this Book?
The Goals of this Book.
The Lay of the Land.
Chapter 2. The Systematic Trading "Edge".
Discretionary Trading.
Raising the Bar.
Verification.
Quantification.
Risk and Reward.
The Performance Profile.
Objectivity.
Consistency.
Extensibility.
The Benefits of the Historical Simulation.
Positive Expectancy.
The Likelihood of Future Profit.
The Performance Profile.
Proper Capitalization.
A Measure of Real-Time Trading Performance.
The Benefits of Optimization.
The Benefits of the Walk-Forward Analysis.
The Advantages of a Thorough Understanding.
Confidence.
Strategy Refinement.
Chapter 3. The Trading Strategy Development Process.
Two Philosophical Approaches to Strategy Development.
The Scientific Approach.
The Path of Empirical Development.
An Overview of the Trading Strategy Design Process.
Step 1: Formulate the Trading Strategy.
Step 2: Translate the Rules into a Definitive Form.
Step 3: Preliminary Testing.
Step 4: Optimize the Trading strategy.
Step 5: the Walk Forward Analysis™.
Step 6: Trade the System.
Step 7: Evaluate Real-Time Performance.
Step 8: Improving the System.
Chapter 4. The Strategy Development Platform.
The Scripting Language.
Diagnostics.
Reporting.
Optimization.
The Objective Function.
Speed.
Automation.
Walk Forward Analysis™.
Portfolio Analysis.
In Conclusion.
Chapter 5. The Elements of Strategy Design.
The Three Principle Components of a Strategy.
Entry and Exit.
Risk Management.
Position Sizing.
An Overview of a Typical Trading Strategy.
A Trade Equals an Entry and an Exit.
Entry Filters.
The Management of Risk.
Trade Risk.
Strategy Risk.
Portfolio Risk.
The Management of Profit.
The Trailing Stop.
Profit Targets.
Position Sizing.
Advanced Strategies.
Summary.
Chapter 6. The Historical Simulation.
The Essential Reports.
The Performance Summary.
The Trade List.
The Equity Curve.
Performance by Period.
The Importance of Accuracy.
Software Limitations.
Rounding Issues.
Phantom Trades.
Price Orders.
Realistic Assumptions.
Price and Trade Slippage.
Opening Gap Slippage.
Opening and Closing Range Slippage.
Slippage Due to Size.
The Significance of Slippage.
Limit Moves.
Major Events and Dates.
Historical Data.
Stock Prices.
Cash Markets.
Futures Markets.
The Continuous Contract.
The Perpetual Contract.
Adjusted Continuous Contracts.
The Size of the Test Window.
Statistical Requirements.
Sample Size and Statistical Error.
How Many Trades?
Stability.
Degrees of Freedom.
Frequency of Trading.
Types of Markets.
The Bull Market.
The Bear Market.
The Cyclic Market.
The Congested Market.
Efficient Markets.
The Life Cycle of a Trading Strategy.
Window Size and Model Life.
Chapter 7. Formulation and Specification.
Formulate the Trading Strategy.
Specification – "Translate" The Idea Into A Testable Strategy.
Make a Vague Idea Precise.
Chapter 8. Preliminary Testing.
Verification of Calculations and Trades.
Calculations.
Trading Rules.
In Summary.
Theoretical Expectations.
Preliminary Profitability.
The Multi-Market and Multi-Period Test.
Selecting the Basket.
Determining the Length of the Test Period.
Segmenting the Data.
The Test.
The Results of the Test.
Chapter 9. Search and Judgment.
Search Methods.
The Grid Search.
The Prioritized Step Search.
Hill Climbing Search Algorithms.
Multi-Point Hill Climbing Search.
Advanced Search Methods.
Simulated Annealing.
Genetic Algorithms.
Particle Swarm Optimization.
General Problems with Search Methods.
The Objective Function.
A Review of a Variety of Evaluation Methods.
Multiple Evaluation Types.
Chapter 10. Optimization.
Optimization contra Overfitting.
A Simple Optimization.
The Optimization Framework.
The Parameters.
The Scan Range.
The Historical Sample.
The Objective Function.
The Optimization Evaluation.
A Multi-Market and Multi-Period Optimization.
The Evaluation of the Optimization.
The Robust Trading Strategy.
The Robust Optimization.
The Statistically Significant Optimization Profile.
The Distribution of the Optimization Profile.
The Shape of the Optimization Profile.
How Does the Strategy Respond to Optimization?
Does the Strategy Deserve Further Development?
Chapter 11. Walk-Forward Analysis.
Is the Trading Strategy Robust?
Robustness and Walk-Forward Efficiency.
The Cure for Overfitting.
A More Reliable Measure of Risk and Return.
Assessing the Impact of Market Changes.
The Best Parameter Set for Trading.
The Theory of Relevant Data.
Peak Performance.
Statistical Rigor.
Shifting Markets.
The Varieties of Market Conditions.
The Walk-Forward.
The Role of the Walk Forward.
Setting Up a Walk-Forward.
An Example of a Walk-Forward Test.
The Walk-Forward Analysis.
The Purpose of the Walk-Forward Analysis.
An Example of a Walk-Forward Analysis.
Is the Strategy Robust?
What Rate of Profit Should We Expect?
What Is the Risk?
Walk-Forward Analysis and the Portfolio.
Chapter 12. The Evaluation of Performance.
The Trading Strategy as an Investment.
The Dimension of Risk.
Compare the Strategy to the Alternatives.
Maximum Drawdown and Trading Risk.
Maximum Drawdown in Context.
Maximum Drawdown and the Trader.
Maximum Run up and the Trader.
Trading Capital and Risk.
Risk Adjusted Return.
Reward to Risk Ratio.
Model Efficiency.
Consistency.
Patterns of Profit and Loss.
Chapter 13. The Many Faces of Overfitting.
What Is Overfitting?
The Abuse of Hindsight.
The Case of the Overfit Forecasting Model.
The Case of the Overfit Trading Model.
The Symptoms of an Overfit Trading Model.
The Causes of Overfitting.
Degrees of Freedom.
Measuring Degrees of Freedom.
Degrees of Freedom, Sample Size and Startup Overhead.
Trade Sample Size.
Optimization Error #1 – Over Parameterization.
Optimization Error #2 –Over Scanning.
The Big Fish in a Small Pond Syndrome.
The Walk-Forward Test.
Chapter 14. Trading the Strategy.
The Mental Aspects of Trading.
Return on Investment.
Poor Strategy.
Market Contraction.
Unseen Market Conditions.
In Conclusion.
Maximum Risk.
Real-time and Evaluation Performance.
Comparing the Evaluation and Trade Profile.
Understanding the Test Profile
Performance Quirks.
The Windfall Profit.
The Losing Run.
Flat Production.
In Conclusion.
Notes.
Index.