Evaluation and Optimization of Trading Strategies

367 Pages·2008·3.23 MB·English

by  Pardo, Robert.

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The Evaluation
and Optimization
of Trading
Strategies
Second Edition
ROBERT PARDO
JohnWiley&Sons,Inc.
v
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ii
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Additional Praise for
The Evaluation and Optimization of
Trading Strategies
“Thedecisivestepinsystemtradingisthedeterminationofthereliability
androbustnessofyoursystem.Thisgreatlyexpandedandveryaccessible
neweditionofBob’sclassicpresentsathoroughyeteasytoapplyandtime-
tested methodology to accurately make this determination. This makes it
possibletoformarealisticideaofhowyoursystemshouldperforminthe
futureandincreasesthelikelihoodoflastingreal-timetradingprofit.”
—MurrayRuggerio,VicePresidentofResearchandDevelopmentfor
TradersStudio;ContributingEditorFuturesMagazine.
“Bob Pardo has re-written his own excellent book, and made it even bet-
ter.Itcontainsabasicstep-by-stepguidetobuildingatradingsystem,along
withanintroductiontoadvancedsystembuildingconceptsandtools.Sim-
plyavoidingtheproblemsanderrorsBobwarnsaboutcanhelpleadtoreal
timesuccess.Amustreadforanyoneinterestedinasystematicapproach
totrading.”
—MichaelTepper,AtlasCapitalManagement,Inc.
“Asignificantcontributionthatwillpresent,explain,clarify,andillustrate
AlgoTradingstrategiesandhowtoproperlytest/optimizetradingmodels,
thoroughlyresearchedandperceptive.Itwillgivethereaderverypractical
and seasoned insight into the world of Algo Trading. Bob Pardo brings a
verylucidapproachtoaveryesotericsubject;awelcomedeparturefrom
mosttexts.Itisbothaccessibleandrigorous,whichisquiterare.”
—BruceJ.Serra,VicePresident,InstitutionalSales,MFGlobalInc.
i
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ii
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The Evaluation
and Optimization
of Trading
Strategies
iii
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Founded in 1807, John Wiley & Sons is the oldest independent publish-
ingcompanyintheUnitedStates.WithofficesinNorthAmerica,Europe,
AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarket-
ing print and electronic products and services for our customers’ profes-
sionalandpersonalknowledgeandunderstanding.
TheWileyTradingseriesfeaturesbooksbytraderswhohavesurvived
the market’s ever-changing temperament and have prospered—some by
reinventing systems, others by getting back to basics. Whether a novice
trader, professional or somewhere in between, these books will provide
theadviceandstrategiesneededtoprospertodayandwellintothefuture.
For a list of available titles, please visit our Web site at www.
WileyFinance.com.
iv
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The Evaluation
and Optimization
of Trading
Strategies
Second Edition
ROBERT PARDO
JohnWiley&Sons,Inc.
v
fm JWPR070-Pardo December17,2007 22:32 CharCount=0
Copyright(cid:1)C 2008byRobertPardo.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
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LibraryofCongressCataloging-in-PublicationData:
Pardo,Robert,1951–
Theevaluationandoptimizationoftradingstrategies/RobertPardo.–2nded.
p. cm.–(Wileytradingseries)
Rev.ed.of:Design,testing,andoptimizationoftradingsystems.c1992.
Includesindex.
ISBN978-0-470-12801-5(cloth)
1.Investments–Dataprocessing. 2.Futures–Dataprocessing. 3.Options(Finance)–Data
processing. I.Pardo,Robert,1951–Design,testing,andoptimizationoftradingsystems.
II.Title.
HG4515.5.P37 2008
332.64(cid:2)5–dc22
2007038106
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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Contents
Foreword xv
Preface xvii
Acknowledgments xxix
Introduction 1
CHAPTER 1 On Trading Strategies 5
WhyThisBookWasWritten 7
WhoWillBenefitfromThisBook? 8
TheGoalsofThisBook 10
TheLayoftheLand 10
CHAPTER 2 The Systematic TradingEdge 17
DiscretionaryTrading 18
RaisingtheBar 19
Verification 22
Quantification 24
RiskandReward 24
ThePerformanceProfile 26
Objectivity 27
Consistency 29
Extensibility 32
TheBenefitsoftheHistoricalSimulation 33
PositiveExpectancy 34
TheLikelihoodofFutureProfit 34
ThePerformanceProfile 35
ProperCapitalization 35
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