Source: Printed using TradeStation by Omega Research Version 4.02.

15-July09 1996.

Figure 14.14 Optimization: intermarket three contd.

For a system to be robust, there must be broad ranges of variables that yield similarly profitable results. When a system is optimized, and the inputs chosen for the system to be traded, the results for neighboring combinations of variables should not be drastically dissimilar.

For a simple system, with two inputs, three-dimensional graphing gives a visual interpretation of system profitability. The system contour itself should have few deep valleys. The input combination should be surrounded by other combinations that also yield good results. The drop-off from there should be mild. Figure 14.15 shows the three-dimensional graph for the net profit of Intermarket Three. We see that there are many values around the combination of Lenl = 3 and Len2 = 9 that yield stable results.

Figure 14.15 Three-dimensional graph: intermarket three-net profit.

Intermarket Three Net Profit

A similar three-dimensional graph, showing the drawdown resulting from the combinations of input values for Intermarket Three, is seen in Figure 14.16. This also shows low drawdown for the area Lenl = 3 and Len2 = 9.

The best trading systems are those that generate entry and exit signals based on market activity, rather than pure money management techniques. However, the performance of many systems, especially with respect to drawdown, is often improved by adding simple stops. If nothing else, the system becomes easier to trade because of the reduced drawdown and the psychological benefit of limiting losses.

Figure 14.16 Three-dimensional graph: Intermarket three-drawdown.

Intermarket Three $ Drawdown

Source: Microsoft Excel. Permission received.