# Optimization: Overview and Examples in Technical Analysis

## What Is an Optimization?

Optimization is the process of making a trading system more effective by adjusting the variables used for [technical analysis](https://www.investopedia.com/terms/t/technicalanalysis.asp). A trading system can be optimized by reducing certain [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp) or [risks](https://www.investopedia.com/terms/r/risk.asp), or by targeting assets with greater [expected returns](https://www.investopedia.com/terms/e/expectedreturn.asp).

### Key Takeaways

*   Optimization is the process of improving a portfolio, algorithm or trading system to reduce costs or increase efficiency.
*   Portfolios can be optimized by reducing risks, increasing expected returns, or changing the frequency of rebalancing.
*   Because markets and laws are constantly changing, optimization is a constant and ongoing process.
*   Trading algorithms need constant optimization, both to adjust for changing market conditions and to reduce the risk of programming errors.
*   Because optimizing one factor may require tradeoffs in other factors, there is a danger of over-optimization.

## How an Optimization Works

Broadly speaking, optimization is the act of changing an existing process in order to increase the occurrence of favorable outcomes and decrease the occurrence of undesirable outcomes. This can be used to make a business model more profitable, increase the [expected returns](https://www.investopedia.com/terms/e/expectedreturn.asp) on an investment portfolio, or decrease the expected costs of a trading system.

Each optimization depends upon a certain number of assumptions about real-world variables. For example, an investor seeking to optimize their portfolio would begin by assessing factors such as [market risk](https://www.investopedia.com/terms/m/marketrisk.asp) and the likelihood that certain investments may outperform others. Since there is no way to calculate these variables in real time, the investor's optimization strategy would depend upon how well they estimate these factors.

There may be multiple paths to optimization, depending on the assumptions underlying an optimization strategy. Some traders might optimize their strategy with a number of [short-term trades](https://www.investopedia.com/articles/trading/05/011705.asp) to take advantage of predictable price swings. Others might optimize by reducing the number of trades in order to reduce their [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp). In either case, the success of an optimization strategy will depend on how well the investor has identified the risks, costs, and potential payouts of their strategy.

> **Fast Fact**
>
> Because market conditions are constantly changing, optimizing one's trading system is an going process–like trying to hit a moving target.

## Who Uses Trading Systems for Technical Analysis?

Trading systems can be used by just about anyone. Individual investors and major institutions alike may have systems that they rely on to provide detailed information to help them choose investment strategies. Individuals acting on their own behalf may have rudimentary systems that they have created themselves that may not require technological experience or coding knowledge.

There are also trading systems available online that anyone can take advantage of. A Google search for trading systems will result in lists of both free systems and ones that require payment or membership to use.

Institutions will rely on more sophisticated systems. Many will have their own systems designed to be used in house. These systems will be more advanced and offer more options for optimizing than the free ones novice or casual traders can find online.

Whatever system an investor uses, they should use it with the knowledge that data can still report incorrectly, and systems can fail. A trading system is just another tool investors can use when investing; it does not replace the need for critical thinking.

## Advantages and Disadvantages of Optimization

Business optimization is an important element of the [market economy](https://www.investopedia.com/ask/answers/033015/what-are-some-advantages-market-economy-over-other-types-economies.asp). As companies compete against one another to increase profits and reduce costs, they also find ways to provide improved products and lower prices to their consumers. They may also find ways to use resources more efficiently, reduce pollution and other externalities.

In the world of investments, there are few drawbacks to a well-executed optimization. By identifying missed opportunities and eliminating underperforming assets, an optimized portfolio can produce potentially higher investment returns.

However, most optimizations come with tradeoffs and [opportunity costs](https://www.investopedia.com/terms/o/opportunitycost.asp) in other areas. For example, a fund that optimizes to reduce its risk profile is also likely to miss out on the payoffs of certain high-risk strategies, and a company that optimizes by reducing labor costs might find itself short-staffed in the event of a sudden increase in demand. When companies try to fine-tune to increasing levels of precision, there is a danger that they may over-optimize by reducing their preparedness for an unexpected eventuality.

### Advantages and Disadvantages of Optimization

Pros

*   Optimization helps businesses reduce costs and increase revenues.
    
*   Optimization also benefits the market by reducing deadweight and inefficiencies.
    

Cons

*   Optimizing one parameter typically comes with tradeoffs in others.
    
*   There is a risk of over-optimization as companies reduce their preparedness for unexpected contingencies.
    
*   Changing market conditions might reduce the effectiveness of optimization.
    

## Example of Optimization

An interesting example of business optimization occurs in [supply chain management](https://www.investopedia.com/terms/s/scm.asp), the industry concerned with the large-scale transportation and storage of trade goods around the world. In order to keep operations running smoothly, most industrial enterprises rely upon a large network of logistics providers and suppliers to keep their factories running.

Beginning in the 1970s, companies like Toyota began optimizing their inventory systems with [just in-time](https://www.investopedia.com/terms/j/jit.asp) production. By manufacturing and delivering items as they were needed, this system allowed manufacturers to reduce the costs associated with storage and warehousing.

However, JIT manufacturing requires a fine-tuned logistics system and the ability to accurately forecast future demand. It also comes with tradeoffs in terms of flexibility and resilience. Since there is little room for error, any delay in deliveries could have a [compounding effect on the supply chain](https://www.investopedia.com/ask/answers/040215/what-are-main-problems-jit-just-time-production-strategy.asp), potentially causing production to stall.

## The Bottom Line

Optimization is an important process in maintaining a business or trading system. By adjusting system parameters to reduce costs and maximize output, optimization allows businesses and traders to become more efficient and competitive.

## What Is Mathematical Optimization?

Mathematical optimization is a field of applied mathematics that seeks to find a combination of input variables that maximizes or minimizes the output return of a multi-variable function. When used in business, these techniques could be used to fine-tune production processes to minimize certain costs or increase per-unit output.

## What Does Optimization Mean in Business?

In business, optimization is the process of fine-tuning a business strategy or process in order to improve efficiency or reduce costs. This can be done by using resources more efficiently, cutting costs, or investing in labor-saving technologies.

## What Is Search Engine Optimization?

Search engine optimization, or SEO, is the process of fine-tuning an online article or website in order to reach more potential readers through online search. This is typically done by strategically placing keywords or related phrases in order to rank higher in search engine results.

## What Is Conversion Rate Optimization?

In sales, conversion is the process of turning potential leads into customers. Conversion rate optimization is a process of increasing the number of new customers in order to increase sales. This can be done by improved marketing, sales training, or otherwise making their product more appealing.