Archive for November, 2009

Evaluating the Fitness of a Fitness Function

November 9, 2009

The walk-forward process of system development is the final test of a system before real capital gets allocated. It validates the system on out-sample data, or data that hasn’t been peeked at during development. It’s not very complicated, really. You optimize your system on a range of data and then choose the best parameter set to trade with in the out-sample period. Then you observe the results and determine if the system warrants any capital investment. As with most things in system trading, you need to make a decision on how you approach this idea of picking the best parameter set. Who or what decides what is best? The arbiter is known as a fitness function, because it determines which parameter set is best suited for future trading. Not all fitness functions are created equal though. Let’s look at three fitness functions and see how they offer different results. (more…)

A Short List of Candidates

November 6, 2009

You can’t trade everything. Well, at least you can’t trade everything well. At some point, you should limit the universe of things you trade. And it’s okay. You don’t need to trade everything because quite frankly, nobody knows what you’re talking about anyway at the weekend cocktail party, and they don’t care. I implore you to be prudent in this way: commit to trading a specific world of underlyings, and quit chasing bright lights in the depths of the ocean, like everyone’s favorite Nemo character, Dory the Blue Tang. (more…)