Optimization is a myth – with Jack Schwager

Optimization is a myth.

Most traders are doing it wrong.

And it’s killing their trading strategies.

Here’s 6 insights from my chat with Jack Schwager, author of the Market Wizards books, about “Optimization Myths”…

1. Optimization Lies

Historically optimized results are grossly overstated.

There’s a very big difference between what’s optimal in the past and what will be optimal in the future.

Optimizing to give the best results for the past is a flawed approach.

2. Optimization Myths

Optimization by definition is all hindsight.

Optimization adds very little to the power of the system.

You can only have confidence in a strategy if it works without hindsight.

3. Optimization Value

Optimization is only useful to identify broad ranges.

Use it to identify extreme ranges where things don’t work and broad ranges that do.

Traders try to fine tune exact versions of the system they’re trading.

That doesn’t work.

4. Average Parameters

3 options to avoid overfitting and enhance system reliability:

1. Take the average of all parameter sets as a good proxy for what the system can do,

2. If you have enough money, trade each of the variations,

3. Hire a monkey to choose…

5. Market Influence

The market can cause horrific losses.

The market can also be the source of tremendously great performance.

Traders need to be very careful deciding whether it’s the market or the strategy that’s good.

6. Human Frailty

Most people lose in trading because they want what feels comfortable.

Traders add rules to make trading easier to handle, but it’s a trap…

Adding more rules makes the strategy much less robust, and more likely to fail.

Optimization is a widely used approach in trading.

Like all tools, it has advantages but can also be abused.

Traders need to be mindful of the impact optimization can have on their trading.

Full Interview

Watch my full discussion with Jack:

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