Ultimate Algorithmic Trading System

Here are the various calculations that are used to determine the total number of bars
per run, in-sample number of bars, and out-of-sample number of bars.
TotalBarsPerRun—Total number of bars / (Walk-forward runs * Out-ofsample
% + In-sample %). In our example test, there were a total of 3415
bars, 10 walk-forward runs, 20 OOS%, and 80 percent in-sample. WFO uses
bars in place of days to calculate the walk-forward window lengths.
TotalBarsPerRun = 3415 / (10 * 0.2 + 0.8) = 1219
InSampleBarsPerRun – TotalBarsPerRun * In-sample%
InSampleBarsPerRun = 1219 * 0.8 = 975
OutOfSampleBarsPerRun – TotalBarsPerRun * Out-of-sample%
OutOfSampleBarsPerRun = 3414 * 0.2 = 244
The first interval analyzes the first 975 bars of data and determines the best
parameter set and then carries that set on unseen data for 244 bars. The second test
starts on bar 976 and ends on 1950 (976 + 974) and then walks forward 244 more
days. Figure 8.7 illustrates this process by showing how four years are used to decide
the best parameters using hindsight and then how those parameters are applied to
unseen data the following year.
The WFO produces a WFA report that determines the usefulness of applying this
type of optimization to this particular trading algorithm. Before showing the contents
of this report let’s create a benchmark parameter set and compare those results
with those produced by the WFO. A benchmark can be created by using a fixed
parameter set throughout the entire test time period. This is easily accomplished by
setting the four parameters to the following values:
xLongEntryLen = 40, xLongExitLen = 20, xShortEntryLen = 40,
xShortExitLen = 20
In addition to making the parameters static notice that the system was also made
symmetrical; the buy-side parameters are the same as the sell-side parameters. This
particular parameter set did perform better over the walk-forward optimization as
it produced almost $17,000, whereas the WFO produced nearly $10,000 in profit.
253
GENETIC OPTIMIZATION, WALK FORWARD
2001 2002 2003 2004 2005
2002 2003 2004 2005 2006
2003 2004 2005 2006 2007
2004 2005 2006 2007 2008
FIGURE 8.7
How four years of hindsight are used to predict unseen data for the following year.
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