Optimization – the blessing and the curse of algo trading

Do you remember how the performance of a simple overnight strategy that we created earlier in this chapter radically changed when we replaced a tight stop of 5 pips with a wider stop of 50 pips?

But this fact raises another important question: why 5 and 50 pips? Why not 6 and 45? Or 10 and 76?

Any quantitative strategy depends on the values of its parameters, and the procedure of finding the best combination of parameters that delivers the best results of the backtesting is called optimization.

Optimization is a massive topic. I’d even say it’s overwhelmingly vast and complex. At first glance, it looks straightforward: let’s find the best combination of parameter values and then run the strategy live with these very values. However, the problem is that we always test and optimize our strategies using past data. And I hope you already understood and remember well that markets are anything...