DEFINITION of 'Optimization'

In the context of technical analysis, it is the process of adjusting one's trading system in an attempt to make it more effective. These adjustments include changing the number of periods used in moving averages, changing the number of indicators used, or simply taking away what doesn't work.

BREAKING DOWN 'Optimization'

For example, if an investor has a simple trading system that is just composed of a crossover of closing price and a moving average, by changing the periods of the moving average, the trader will get different profits, risk, capital drawdowns, etc. Thus, optimization helps you to choose the optimal parameters to trade.

  1. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of ...
  3. Backtesting

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  4. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  5. Crossover

    The point on a stock chart when a security and an indicator intersect. ...
  6. Technical Analysis

    A method of evaluating securities by analyzing statistics generated ...
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