parameter you find on the vertical axis the net profit in arbitrary units.

The best input parameter of this artificial trading system in terms of net profi
t would be
17. With this parameter the system gained 80,000 units. But look at its neighbou
rhood.
In the next neighbourhood, with parameter 16, the system s profit is very poor (5000
units) or with parameter 18 there is even a loss (-10,000 units). If your traded
market
only slightly changes in the future you will never be able to repeat this good p
rofit which
showed with parameter 17 in your back-test. So although in this hypothetical sys
tem 17
was the best parameter in the past, it is certainly not your best choice for the
future.
If you, however, choose a parameter in the region between 4 and 10, e.g. 8, you
are in
safer territory. In that area your past net profit was not as high as your best
fit parameter,
but the parameters in the neighbourhood have similar profits to your chosen para
meter.
All gained profits are around 60,000 units. If the market changes in the future
it is very
likely that your trading system will still generate similar profits to those whi
ch it showed
in the back-test with parameter 8 or with any other parameter between 4 and 10.
So it is
these broad plateaus of good (not necessarily the best!) parameters which you ha
ve to find.
Figure 3.4: Choosing stable parameters for your trading system: Net profit as a
function of
one system input parameter in arbitrary units. Artificially generated result of
a hypothetical
trading system.
50How to develop a trading system step-by-step using the example of the British po
und/US dollar pair
Dependency of main system figures on the two moving
averages
From theory back to reality. Let s check how our trading system LUXOR behaves when
changing its two input parameters, including trading costs of $30 slippage and
commissions per round turn. We want to see how the results of our trend-followin
g system
change when the lengths of the fast and slow moving averages are varied. We chan
ge the
two averages in a wide range, the fast moving average length from 1 bar to 20 ba
rs in
steps of 1, the slow moving average length from 21 bars to 80 bars, also in step
s of 1. A
fast PC computes the necessary 1200 system tests in about three minutes.
From these tests you can plot the total net profit as a function of the two vari
ed input
parameters. You can do this for each input parameter separately (as shown in Fig
ure 3.4)
but you can even do this for two system parameters in the same three-dimensional
area
graph (Figure 3.5). Like this you get a surface in three dimensions which sho