Trading Techniques  |  FEB 2000

Forcing Optimization by Vincenzo Sciarretta

Forcing Optimization by Vincenzo Sciarretta Sooner or later, most system-oriented traders backtest a mechanical system and get a positive result - and then have it perform poorly in real-life situations. What gives? Sooner or later, most system-oriented traders experience this dismaying conundrum: They formulate a mechanical system, backtest it over a convenient period, and get a very positive result. They watch the equity line and see it rise in an almost straight line with small but acceptable drawdowns. With a methodology called forcing optimization. As an example of contrary results, I used a mechanical system from Martin Pring’s excellent Technical Analysis Explained. The system presented by Pring was devised for the dollar/sterling on a weekly basis, but that’s not the way I’ll be using it here. This mechanical system combines a moving average and two rates of change,a short one and a long one. Here are the system rules in general terms: Things look downright rosy.But then they start trading the market and, despite the positive backtesting,proceed to lose money with the system!Why this occurs with dismal and predictable regularity is too expansive a subject to get into here;I will deal with it at another time. But we can discuss how to limit this sad but all-too-common occurrence,

by Vincenzo Sciarretta