The Evaluation and Optimization of Trading Strategies

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.

Auteur
Robert Pardo is a recognized expert in the design and testing of trading strategies and computerized trading applications, and a long-standing professional money manager. 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. Since 1983, Pardo has continuously updated his software as well as designed, programmed, and documented versions of various commercial trading applications. He has worked as a consultant with world-class trading firms such as Goldman Sachs, Transworld Oil, and Daiwa Securities, and created the XT99 trading platform as a joint venture and ongoing strategic alliance between Pardo Capital Limited and Dunn Capital Management. Contact Robert at rep@pardocapital.com, or go to his Web site at http//www.pardocapital.com.

Résumé
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 usingstochastics, 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.

Contenu

Foreword xv

Preface xvii

Acknowledgments xxix

Introduction 1

Chapter 1 On Trading Strategies 5

Why This Book Was Written 7

Who Will Benefit from This Book? 8

The Goals of This Book 10

The Lay of the Land 10

Chapter 2 The Systematic Trading Edge 17

Discretionary Trading 18

Raising the Bar 19

Verification 22

Quantification 24

Risk and Reward 24

The Performance Profile 26

Objectivity 27

Consistency 29

Extensibility 32

The Benefits of the Historical Simulation 33

Positive Expectancy 34

The Likelihood of Future Profit 34

The Performance Profile 35

Proper Capitalization 35

A Measure of Real-Time Trading Performance 36

The Benefits of Optimization 37

The Benefits of the Walk-Forward Analysis 38

The Advantages of a Thorough Understanding 39

Confidence 40

Strategy Refinement 41

Chapter 3 The Trading Strategy Development Process 43

Two Philosophical Approaches to Strategy Development 44

The Scientific Approach 44

The Path of Empirical Development 45

An Overview of the Trading Strategy Design Process 47

Step 1: Formulate the Trading Strategy 49

Step 2: Translate the Rules into a Definitive Form 49

Step 3: Preliminary Testing 50

Step 4: Optimize the Trading Strategy 51

Step 5: The Walk-Forward Analysis 52

Step 6: Trade the System 53

Step 7: Evaluate Real-Time Performance 54

Step 8: Improving the System 55

Chapter 4 The Strategy Development Platform 57

The Scripting Language 58

Diagnostics 59

Reporting 62

Optimization 68

The Objective Function 68

Speed 68

Automation 69

Walk-Forward Analysis 69

Portfolio Analysis 70

In Conclusion 71

Chapter 5 The Elements of Strategy Design 73

The Three Principal Components of a Strategy 74

Entry and Exit 74

Risk Management 74

Position Sizing 75

An Overview of a Typical Trading Strategy 75

A Trade Equals an Entry and an Exit 76

Entry Filters 78

The Management of Risk 79

Trade Risk 80

Strategy Risk 82

Portfolio Risk 84

The Management of Profit 85

The Trailing Stop 85

The Impact of Overnight Change on the Trailing Stop 87

Profit Targets 87

The Impact of Overnight Change on Target Orders 88

Position Sizing 89

Advanced Strategies 91

Summary 92

Chapter 6 The Historical Simulation 93

The Essential Reports 94

The Performance Summary 94

The Trade List 94

The Equity Curve 107

Performance by Period 108

The Importance of Accuracy 109

Software Limitations 109

Rounding Issues 109

Phantom Trades 111

Price Orders 112

Realistic Assumptions 113

Price and Trade Slippage 113

Opening Gap Slippage 115

Opening and Closing Range Slippage 116

Slippage Due to Size 117

The Significance of Slippage 117

Limit Moves 118

Major Events and Dates 118

Historical Data 120

Stock Prices 120

Cash Markets 120

Futures Markets 121

The Continuous Contract 124

The Perpetual Contract 124

Adjusted Continuous Contracts 125

The Size of the Test Window 126

Statistical Requirements 127

Sample Size and Statistical Error 127

How Many Trades? 129

Stability 129 <p&g...