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Best Models and Settings

How do you decide which models to use with which settings? There are many different combinations of models and settings and it is not easy to determine which one to use. Back Testing is of some help and produces estimations of the expected returns on average, but the variance is large and the results are not conclusive enough [...read more].

With the Best Models and Settings feature you can let Optimal Trader help you select active models and their optimization settings for your stocks. Optimal Trader will automatically find the best active models and the best optimization settings based on empirical results for the current price behaviour pattern. Using this feature will allow you to base your investment decisions with the statistical best indicators and settings, which will allow you to obtain higher returns in the long run and with a diversified portfolio.

This feature is based on the assumption that no model is optimal to use in every situation. Different market conditions require different indicators. For example: trend-following indicators work well in trending times when volatility is low, but not when there is no trend and volatility is high.

Thus it may be reasonable to classify the current price behaviour in several dimensions. The classification then determines which indicators and which settings to use.

According to Curtis Faith book 'Way of the Turtle' it may be reasonable to classify a time series in two dimensions: the current trend strength and the current volatility. Optimal Trader has taken this a step further. The current price behaviour is classified in terms of

• the current trend strength,
• the current short term volatility,
• the long term volatility and
• Hurst Exponent estimation.

The best models and the best optimization settings are then selected for the current classified behaviour from a huge database with over 1.5 million results. The database contains classified model results for stocks, currencies, indices and funds back to the 1980s.

You can also select to use the database to find the best optimization period for the current price behaviour. In that case Optimal Trader will not only select the best settings (the best Window and the best combination of the Robust Optimization, the Robust Parameters and the Limit Curve Fitting settings). It will also find the best optimization period for these settings.

Best Models and Settings also shows you a report with the expected returns (on average) with your current settings and the current price behaviour. The returns are relative to a buy-and-hold strategy and valid only after optimizing the models. Please note that the values are average returns and that variance is large.

Please read the section Reports to fully understand the generated reports. Settings made for Reports are also valid for reports in Best Models and Settings. Remember that the setting Trading Horizon affects the results in Best Models and Settings.