Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

DIVERSIFICATION OF PARAMETER SETS

Assuming that a trading account has adequate equity under management, it is preferable to diversify parameter sets rather than to trade multiple contracts with the same parameter set. Although there maybe strong positive correlations between parameter sets of the same trading system, Tables 7.1 to 7.20 show that even minor modifications to parameter sets can make the difference between an overall profitable or losing outcome. Furthermore, as shown in Chapter 7, because we can never be certain as to which parameter set will outperform in the future, parameter set diversification greatly aids in minimizing regret. Minimization of regret in this context strengthens our psychological ability to adhere to a disciplined and consistent (e.g., systematic and/or mechanical) approach toward trading.²

A comparison of Tables 9.1 and 9.2 exemplifies this final point. Table 9.1 shows the results of various parameter sets on the two moving average crossover system for IMM Swiss franc during the in-sample period of 1993 to 2002. Notice that the best-performing parameter set in this Table was the 10- and 29-day moving average crossover; the second-to-worst-performer was the 7- and 20-day parameter set. Compare this with Table 9.2, which is the same system on the IMM Swiss franc for the out-of-sample year of 2003. Not only is the best-performing parameter set of our in-sample period now the worst performer, but also our second-to-worst in-sample performer has now ...