Ultimate Algorithmic Trading System

Crossover Rate
The rate that determines how many parents will mate. If the default value is set to
0.4, or 40 percent, then each chromosome has a probability of 2 out of 5 of being
mated with another chromosome and being replaced. If this rate is set to 1.0, or
100 percent, then a new generation is always created—no survivors are allowed.
As in life, sometimes it’s good to have a member or two from the old generation to
help guide us. The Suggest button usually changes this value to 0.9, or 90 percent
probability of chromosome matching.
■ Preventing Over-Curve-Fitting
If optimization is a form of curve fitting, then why do it at all? Curve fitting is
a necessary tool in the development of trading algorithms. If a trading system is
based on a sound market principle, then modifying it by adjusting its parameters
to increase productivity is a good thing. However, this can be overdone. If you
‘‘tweak’’ an algorithm’s parameters to catch a large portion of every substantial
market move and create an absolutely beautiful equity curve, then you have gone
too far. The system might work well in the near future due to curve fit overhang,
but the likelihood of it continuing is less probable. The future is unknown but a
robust trading algorithm that does not have overly curved fit parameters has a higher
probability of success. Take a look at the 3D contour chart in Figure 8.5. The y-axis
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GENETIC OPTIMIZATION, WALK FORWARD
FIGURE 8.5
Robust parameter sets are found on a level plateau.
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