Optimization Basics

Optimization is the process of finding the best parameter values for your strategy. Done correctly, it improves performance. Done incorrectly, it leads to overfitting.

What Can Be Optimized

• Indicator periods (e.g., RSI period from 10 to 20)
• Entry and exit thresholds (e.g., RSI entry level from 25 to 35)
• Stop loss and take profit percentages
• Position sizing parameters
• Timeframe selection

Safe Optimization Process

1. 1Choose one or two parameters to optimize at a time — not everything at once
2. 2Define a reasonable range for each parameter
3. 3Run backtests across the parameter range
4. 4Look for a broad zone of profitability, not a single optimal point
5. 5Test the optimized strategy on out-of-sample data to verify it's not overfitted

Signs of Overfitting

• Optimal parameters are extreme outliers (e.g., RSI period of 3 or 97)
• Small parameter changes dramatically affect results
• The strategy performs well on the test period but poorly on other periods
• The strategy has too many parameters relative to the number of trades