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 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 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 to take advantage of predictable price swings others might optimize by reducing the number of trades in order to reduce their transaction costs 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 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 optimizationbusiness optimization is an important element of the market economy 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 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 optimization helps businesses reduce costs and increase revenues optimization also benefits the market by reducing deadweight and inefficiencies 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 optimizationan interesting example of business optimization occurs in supply chain management 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 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 potentially causing production to stall the bottom lineoptimization 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 