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The Evaluation and Optimization of Trading Strategies, 2nd Edition

Book Description

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.

Table of Contents

  1. Praise
  2. Title Page
  3. Copyright Page
  4. Foreword
  5. Preface
    1. THERE AND BACK AGAIN
    2. COMPUTING
    3. THE INVESTMENT INDUSTRY
    4. TRADING STRATEGY DEVELOPMENT TOOLS
    5. THE RISE OF ADVANCED MATHEMATICAL CONCEPTS IN TRADING
    6. TRADING MEETS HIGHER EDUCATION
  6. Acknowledgments
  7. Introduction
  8. CHAPTER 1 - On Trading Strategies
    1. WHY THIS BOOK WAS WRITTEN
    2. WHO WILL BENEFIT FROM THIS BOOK?
    3. THE GOALS OF THIS BOOK
    4. THE LAY OF THE LAND
  9. CHAPTER 2 - The Systematic Trading Edge
    1. DISCRETIONARY TRADING
    2. RAISING THE BAR
    3. VERIFICATION
    4. QUANTIFICATION
    5. RISK AND REWARD
    6. THE PERFORMANCE PROFILE
    7. OBJECTIVITY
    8. CONSISTENCY
    9. EXTENSIBILITY
    10. THE BENEFITS OF THE HISTORICAL SIMULATION
    11. POSITIVE EXPECTANCY
    12. THE LIKELIHOOD OF FUTURE PROFIT
    13. THE PERFORMANCE PROFILE
    14. PROPER CAPITALIZATION
    15. A MEASURE OF REAL-TIME TRADING PERFORMANCE
    16. THE BENEFITS OF OPTIMIZATION
    17. THE BENEFITS OF THE WALK-FORWARD ANALYSIS
    18. THE ADVANTAGES OF A THOROUGH UNDERSTANDING
    19. CONFIDENCE
    20. STRATEGY REFINEMENT
  10. CHAPTER 3 - The Trading Strategy Development Process
    1. TWO PHILOSOPHICAL APPROACHES TO STRATEGY DEVELOPMENT
    2. AN OVERVIEW OF THE TRADING STRATEGY DESIGN PROCESS
  11. CHAPTER 4 - The Strategy Development Platform
    1. THE SCRIPTING LANGUAGE
    2. DIAGNOSTICS
    3. REPORTING
    4. OPTIMIZATION
    5. THE OBJECTIVE FUNCTION
    6. SPEED
    7. AUTOMATION
    8. WALK-FORWARD ANALYSIS
    9. PORTFOLIO ANALYSIS
    10. IN CONCLUSION
  12. CHAPTER 5 - The Elements of Strategy Design
    1. THE THREE PRINCIPAL COMPONENTS OF A STRATEGY
    2. AN OVERVIEW OF A TYPICAL TRADING STRATEGY
    3. A TRADE EQUALS AN ENTRY AND AN EXIT
    4. THE MANAGEMENT OF RISK
    5. THE MANAGEMENT OF PROFIT
    6. POSITION SIZING
    7. ADVANCED STRATEGIES
    8. SUMMARY
  13. CHAPTER 6 - The Historical Simulation
    1. THE ESSENTIAL REPORTS
    2. THE IMPORTANCE OF ACCURACY
    3. SOFTWARE LIMITATIONS
    4. REALISTIC ASSUMPTIONS
    5. LIMIT MOVES
    6. MAJOR EVENTS AND DATES
    7. HISTORICAL DATA
    8. STOCK PRICES
    9. CASH MARKETS
    10. FUTURES MARKETS
    11. THE CONTINUOUS CONTRACT
    12. THE PERPETUAL CONTRACT
    13. ADJUSTED CONTINUOUS CONTRACTS
    14. THE SIZE OF THE TEST WINDOW
    15. HOW MANY TRADES?
    16. STABILITY
    17. DEGREES OF FREEDOM
    18. FREQUENCY OF TRADING
    19. TYPES OF MARKETS
    20. EFFICIENT MARKETS
    21. THE LIFE CYCLE OF A TRADING STRATEGY
    22. WINDOW SIZE AND MODEL LIFE
  14. CHAPTER 7 - Formulation and Specification
    1. FORMULATE THE TRADING STRATEGY
    2. SPECIFICATION—TRANSLATE THE IDEA INTO A TESTABLE STRATEGY
    3. MAKE A VAGUE IDEA PRECISE
  15. CHAPTER 8 - Preliminary Testing
    1. VERIFICATION OF CALCULATIONS AND TRADES
    2. THEORETICAL EXPECTATIONS
    3. PRELIMINARY PROFITABILITY
    4. THE MULTIMARKET AND MULTIPERIOD TEST
  16. CHAPTER 9 - Search and Judgment
    1. SEARCH METHODS
    2. ADVANCED SEARCH METHODS
    3. GENERAL PROBLEMS WITH SEARCH METHODS
    4. THE OBJECTIVE FUNCTION
    5. A REVIEW OF A VARIETY OF EVALUATION METHODS
    6. MULTIPLE EVALUATION TYPES
  17. CHAPTER 10 - Optimization
    1. OPTIMIZATION CONTRA OVERFITTING
    2. A SIMPLE OPTIMIZATION
    3. THE OPTIMIZATION FRAMEWORK
    4. A MULTIMARKET AND MULTIPERIOD OPTIMIZATION
    5. THE EVALUATION OF THE OPTIMIZATION
    6. THE ROBUST TRADING STRATEGY
    7. THE STATISTICALLY SIGNIFICANT OPTIMIZATION PROFILE
    8. THE DISTRIBUTION OF THE OPTIMIZATION PROFILE
    9. THE SHAPE OF THE OPTIMIZATION PROFILE
    10. HOW DOES THE STRATEGY RESPOND TO OPTIMIZATION?
    11. DOES THE STRATEGY DESERVE FURTHER DEVELOPMENT?
  18. CHAPTER 11 - Walk-Forward Analysis
    1. IS THE TRADING STRATEGY ROBUST?
    2. ROBUSTNESS AND WALK-FORWARD EFFICIENCY
    3. THE CURE FOR OVERFITTING
    4. A MORE RELIABLE MEASURE OF RISK AND RETURN
    5. ASSESSING THE IMPACT OF MARKET CHANGES
    6. THE BEST PARAMETER SET FOR TRADING
    7. THE THEORY OF RELEVANT DATA
    8. SHIFTING MARKETS
    9. THE VARIETIES OF MARKET CONDITIONS
    10. THE WALK-FORWARD
    11. THE ROLE OF THE WALK-FORWARD
    12. SETTING UP A WALK-FORWARD
    13. AN EXAMPLE OF A WALK-FORWARD TEST
    14. THE WALK-FORWARD ANALYSIS
    15. IS THE STRATEGY ROBUST?
    16. WHAT RATE OF PROFIT SHOULD WE EXPECT?
    17. WHAT IS THE RISK?
    18. WALK-FORWARD ANALYSIS AND THE PORTFOLIO
  19. CHAPTER 12 - The Evaluation of Performance
    1. THE TRADING STRATEGY AS AN INVESTMENT
    2. THE DIMENSION OF RISK
    3. COMPARE THE STRATEGY TO THE ALTERNATIVES
    4. MAXIMUM DRAWDOWN AND TRADING RISK
    5. RISK ADJUSTED RETURN
    6. REWARD TO RISK RATIO
    7. MODEL EFFICIENCY
    8. CONSISTENCY
    9. PATTERNS OF PROFIT AND LOSS
  20. CHAPTER 13 - The Many Faces of Overfitting
    1. WHAT IS OVERFITTING?
    2. THE ABUSE OF HINDSIGHT
    3. THE CASE OF THE OVERFIT FORECASTING MODEL
    4. THE CASE OF THE OVERFIT TRADING MODEL
    5. THE SYMPTOMS OF AN OVERFIT TRADING MODEL
    6. THE CAUSES OF OVERFITTING
  21. CHAPTER 14 - Trading the Strategy
    1. THE MENTAL ASPECTS OF TRADING
    2. RETURN ON INVESTMENT
    3. MAXIMUM RISK
    4. REAL-TIME AND EVALUATION PERFORMANCE
    5. COMPARING THE EVALUATION AND TRADE PROFILE
    6. UNDERSTANDING THE TEST PROFILE
    7. PERFORMANCE QUIRKS
    8. IN CONCLUSION
  22. Notes
  23. Index