The Evaluation and Optimization of Trading Strategies

It would be an understatement to say that the world has changeddramatically in the sixteen years since the first edition ofDesign, Testing, and Optimization of Trading Systems waspublished in 1991. With all of the changes in communications,technology, and trading styles, a thorough and comprehensiveworking knowledge of how to properly design and test strategies hasnever been more important than it has become in today’s extremelycompetitive markets. Robert Pardo argues that a trading strategycan only be properly evaluated and successfully traded when profitand risk have been measured precisely and accurately—whichcan only be done through computerized testing. In this updated andrevised edition of his classic work, Pardo, a professional moneymanager and renowned expert in the design and testing of tradingstrategies and computerized trading applications, provides aclear-cut and specific road map for traders who want to transform atrading idea into a tested, verified, properly capitalized, andprofitable automated trading strategy.

Pardo shows that the benefits of correct testing andoptimization vastly outweigh the effort required to learn andmaster their proper application, and sets forth in detail thecorrect way to formulate, test, and evaluate a trading strategy. Heexplains how to properly optimize a trading strategy, incorporateout-of-sample data in the testing of a strategy, performWalk-Forward Analysis, develop a trading strategy profile, andjudge real-time trading performance with respect to the tradingstrategy profile developed via historical testing. In addition, heidentifies the symptoms of overfitting—optimizationthat has “gone bad” and resulting in false conclusions and offersguidelines to avoid it.

The trading game has never been as large or as lucrative as itis today. Nor have the markets ever been more efficient than theyare today. Yet traders the world over continue to make profits.Why? They have found an edge. For anyone planning to employalgorithmic or mechanical strategies in their trading, this bookpresents, in a straightforward and accessible style, the edge thatyou can use to obtain and enjoy the fruits of profitabletrading.