I read Ralph books a long time ago and did not remember that he used f as a measure to optimize a systems performance against. What this is doing is balancing profit with the largest losing trade. This is an automated way of optimizing to remove a few large losing trades, which if the sample size is small could lead to dangerous curve fitting.
Since our goal is to find the best system for the future, not make the most money historically just finding a method, which removes a few large losers, is not the best idea. We could modify this concept by substituting a more robust measure than largest losing trade, yes its not optimal f any more but it better for the purpose of system optimization, One example would be to calculate drawdown using Monte Carlo simulation at the 5% level, or
- (average drawdown + 3*stddev(Drawdown)) over the population, assuming drawdown is reported as a postive number otherwise it would be
(average drawdown-3*stddev(Drawdown)). We would then use one of these calculations to replace the largest losing trade in the optimal f equation. These values will not produce a system which makes the most money historically based on f but will produce if sample size is large enough a good measure for optimization.
The problem is that this is a powerful methodology and could be dangerous if not used correctly. If we optimize over a large sample size of trades in the development set and over a large range of parameters, This modified f is valuable because it gives us a single measure of performance so we can more easily look at the surface of the optimization to judge robustness. This is impossible if you have many statistics to look at for a given set of parameters.
This leads to another issue the nature of optimization, do you optimize over all the data, 80% of the data and test on 20%, the problem is that if that 20% is flat, that does not mean that the system is not any good. Finally you could use walk forward testing. I am discussing this money management and optimization issues over the next month or so in my forums at
www.TradersStudio.com , it is free for you to access them you only need to register on the site. Since TradersStudio macro language allows you to code up these ideas, my users will supply good feedback and testing for these concepts.