Optimization

Optimization – The process of adjusting a trading strategy’s parameters to achieve the best performance on historical data. In backtesting, traders optimize by testing different combinations of settings (for example, changing an indicator period or stop-loss size) and selecting those that yield the highest profit or Sharpe Ratio, etc. While optimization can improve in-sample results, it must be done cautiously – aggressive optimization can lead to overfitting. In essence, optimization is about finding the “optimal” parameters for past data, with the goal of improving future performance, but one must verify on out-of-sample data to ensure the strategy hasn’t just been tuned to historical noise.

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