tion is the principle used during the optimization process in making this

selection.
The objective function can be simple or complex. Regardless of complexity, however, the objective function is that algorithm that the optimization process employs to rank and to ultimately select the best combination
of parameters for the trading strategy. The search function, then, is judge
and jury for the trading strategy.
For example, if net profit is our objective function (which by the way, is
not recommended, but since it is widely used and understood, it is helpful
as an example), then that strategy parameter pair that produced the largest
net profit will be selected as best.
Understanding the impact of the search method and of the objective
function are more esoteric and less understood dimensions of the testing
and optimization process. They appear dry and mundane. Yet their impact
on testing and on the understanding of the results is extremely significant.
It is important to keep in mind that the field and literature of optimization theory is extensive and rapidly growing. The current state of the optimization art in contemporary trading strategy development applications
is, to a large degree, actually quite primitive when contrasted to recent developments in optimization theory. Most applications still use brute force
grid search methods coupled with outdated and inefficient search functions such as net profit.
There are add-ins that provide some advanced functionality in this area
such as genetic optimization and Walk-Forward Analysis; 1 there is promise
of more to come.
It is important, however, that the strategist understand that these resources exist and can be brought to bear on a development project. It is
also important to understand that these various advanced search procedures can and should replace these standard grid search methods, which
are currently so prevalent and that these advanced search methods also
have an application in Walk-Forward Analysis.
SEARCH METHODS
All optimization processes use some type of search method, be it simple or
highly sophisticated. The search method will determine the number of tests
to be performed and therefore the amount of processing time required to
complete the process. It will also determine how we will go about searching for those solutions with the highest performance. In some of the moreSearch
and Judgment
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sophisticated search methods, such as a genetic optimization algorithm,
the search function(s) are tightly tied in with the process itself. They guide
which of the many combinations of parameters are actually examined in
situations where there are too many candidates to be able to examine
them all.
Ultimately then, a search method is a way of progressing in an orderly
manner through the different combinations of parameters and then selecting the best set of strategy parameters as defined by the objective function.
In other words, in any optimization, a series of tests are done on historical price data. There may not be time to examine every possible combination of parameters, and so intelligence on the part of the search method
is used to guide the search in productive directions. This is one of the
reasons why there are different methods of searching the optimization
space.
An individual test is one trading simulation on one piece of historical
data with one set of strategy parameters. A trading simulation calculates
all of the trades using the strategy variables and produces a number of
performance statistics, including the strategy s fitness as defined by the
objective function. An optimization or test run is a batch or set of tests. A
successful result of such a process is a set of models that meet minimum
performance criteria such as net profit is greater than zero
or maximum

drawdown is less than 20 percent.

no models that satisfy minim

An unsuccessful test run may result in