What is an 'Optimization'

Optimization is the process of making a trading system more effective by adjusting the variables used for technical analysis.

BREAKING DOWN 'Optimization'

Optimization, in order to work, requires that systems constantly adjust to hit a moving target. From changing the quantity of periods used in moving averages to just simply taking out what doesn't work, optimization is an ongoing process.

Trading systems are developed over a long period of time. Once they have been created, there is a period of beta testing and then optimization based on those results. Once the system has been implemented, real world factors will come into play and may highlight issues that weren’t previously detected. Optimization doesn’t just occur when there are issues. Systems can adjust to be optimized based on changing factors in the market or based off recent technological advancements as well. Finding the best possible combination of settings and factors for the system parameters is vital to the success of any system. In fact, to work correctly a system should continue to periodically re-optimize based on current data and real-world factors.

As with most things, there is still potential for even an optimized system to fail. Additionally, a system can become over-optimized. For example, it may have sample sizes or period durations that are too small to be accurate, or too large to provide fine-tuned information. Also, each factor or rule that is applied to the system can take away from the system’s ability to provide accurate information.  

Who Uses Trading Systems for Technical Analysis          

Trading systems can be used by just about anyone. Individual investors and major institutions alike may have systems that they rely on to provide detailed information to help them choose investment strategies. Individuals acting on their own behalf may have rudimentary systems that they have created themselves that may not require technological experience or coding knowledge. There are also trading systems available online that anyone can take advantage of. A Google search for trading systems will result in lists of both free systems and ones that require payment or membership to use.

Institutions will rely on more sophisticated systems. Many will have their own systems designed to be used in house. These systems will be more advanced and offer more options for optimizing than the free ones novice or casual traders can find online.

Whatever system an investor uses, they should use it with the knowledge that data can still report incorrectly, and systems can fail. A trading system is just another tool investors can use when investing; it does not replace the need for critical thinking.

RELATED TERMS
  1. Currency Day Trading System

    A currency day trading system is a set of guidelines that a foreign ...
  2. Forex System Trading

    A forex system trader is one that builds a portfolio of procedures ...
  3. Optimized Portfolio As Listed Securities ...

    Optimized portfolio as listed securities is a single-country ...
  4. SelectNet

    SelectNet is an automated trading system.
  5. Flexible Manufacturing System - ...

    A flexible manufacturing system is a method for manufacturing ...
  6. Basic Income

    Basic income is a system similar to social security, in which ...
Related Articles
  1. Trading

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  2. Trading

    Trade Forex With A Directional Strategy

    Opening long or short positions to cash in on a trend is one of the simplest ways to trade forex.
  3. Trading

    Top 4 Things Successful Forex Traders Do

    By blending good analysis with effective implementation, you can dramatically improve your profits in the forex trading market. Find out how.
  4. Trading

    The Best Ways to Learn Technical Analysis

    Discover the best ways to learn technical analysis without risking thousands of dollars in the market.
RELATED FAQS
  1. What is the Difference Between a Capitalist System and a Free Market System?

    Learn how capitalism and free market systems work, along with their differences. Read Answer >>
  2. What are the most important aspects of a capitalist system?

    Important aspects of a capitalist system are private property, private control of the factors of production, accumulation ... Read Answer >>
  3. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
  4. When should I use seasonally adjusted data from the consumer price index (CPI)?

    Learn what seasonally adjusted data is, how it is determined, and when it should be used to evaluate the information gathered ... Read Answer >>
Trading Center