System Creation and Optimisation

Filed under: Learn Forex Trading |

This article is intended for the intermediate level forex trader and system creator, so if you are a complete beginner, then it is probably best to start with some of the more elementary articles on this site. The lesson today is all about optimisation when creating systems, and some of the pros and cons of optimising.

 

First of all, optimising is all about getting a trading system working to its maximum effect. For example, a system could have varying levels of success depending on the size of the trailing stop. Many people vilify optimisation as this can lead to something called ‘over-fitting’, whereby too much optimisation is done and important variables are weeded out to make the system look better. However, properly understood, optimisation can be a valuable method of system creation.

 

Figure 1.

Figure 1.

The good news is that the strategy tester in MT4 has an ‘optimisation’ function, and so you can test various variables in your system to find the best possible levels of things like take profit levels, stop losses, trailing stops, and others. If you take a look at Figure 1, you will see the window that opens when you click on the ‘expert properties’ menu. When optimising, you need to look at the ‘start’, ‘step’, and ‘stop’ columns. For example, if you want to find the best possible take profit level for your system, you would set a minimum level to start testing at in the ‘start’ category, with the ‘step’ category being used to set what increments you would like the test to be done at. For example, you could start with a take profit level of 20 pips, and then test the results every twenty pips (so 20,40,60,80…). The ‘Stop’ category is used for the maximum level you want to test. So, if you have a take profit start at 20, a step of 20, and a stop of 100, your optimisation test will test all of the take profit levels of 20,40,60,80, and 100 pips, and you can find out which level is the most profitable.

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