The Secret Art of Backtesting

If you have not back tested your trading system, you might as well trade with your eyes close.

In fact, whatever technical analysis criterion you use to trade with, be it moving averages, candle sticks, volatility breakouts, fibonacci retracements or any other trading system you have devised you're going to need to back test your trading system thoroughly and objectively in order to remove any possible doubt about it's capability.

To remove any self-doubt you need to thoroughly back test or simulate your trading system in such away that it matches the conditions under which it will be traded. Once you have established that you have a reliable and robust trading system only then will you be confident in trading your system.

When trading what is the question in most traders’ mind?

To answer this question I shall quote the introduction from Chapter 8 Back Testing of Mark Jurik’s book Computerized Trading:

Will my trading strategy be profitable? After having gone through the arduous process of crafting a trading strategy, these are the questions you must ask yourself. The ability to answer these questions are the great promises that back testing holds out for all traders. A successful back testing procedure will greatly reduce the probability that you will begin trading with either an unprofitable strategy or one that does not meet your expectations. By adopting a sound and rigorous back testing approach, you will:

  • Pinpoint which approaches to the market that are likely to be successful and which ones are not.
  • Generate good estimates of future performance for each trading strategy you test.
  • Create a record of your trading strategy's historical trading performance.
  • Produce data necessary for other components of your trading approach such as your asset allocation strategy.
  • Important Trading System Criteria

    Profitability is not the only criteria by which a trading system should be evaluated. Drawdown and stress should equally be considered as well... for example, before you open a trading account:

  • Are you satisfied that your system is reliably profitable?
  • Will drawdowns wipe out your account?
  • Is your system trading in a way you can tolerate?
  • Can you tolerate long periods of no trading or too much trading?
  • Can you tolerate a large string of losses?
  • The only way to answer these questions is to subject your trading system to extensive back testing.

    Lack of Confidence

    Lack of confidence usually forces traders to question their own trading systems. They give into the temptation to modify their trading plan with devastating consequences. This temptation spawns on by a string of losing trades or an opportunity to replace their trading system with a whiz-bang indicator that is usually talked about in traders chat forums.

    Anything that sounds to good to be true will attract the attention of a trader who is not satisfied with their own trading system simply because they have not properly tested their system in the first place. In addition, they have not built up the necessary confidence needed to successfully trade the system developed.

    In the end these negative subconscious thoughts will only hinder and destroy your ability to trade successfully. To improve your confidence in your trading system you need to thoroughly and objectively back test it - simple as that! Only then will you be confident enough to commit time and money to it!

    The Traders Dilemma

    How can you test how a trading system will perform over a period of time when trading an arbitrary group of securities?

    --- To truly evaluate the past performance of a trading system you need a trading simulator, which mimics the day-to-day trading activities of a typical trader. Until now this kind of software has been out of the reach of most traders. In fact, there has been some great headway in back testing software. Personally, I use TradeSim with MetaStock.

    TradeSim is the first realistic true trading simulator/analyzer for Metastock that can quickly back-test and evaluate a trading system across a portfolio of securities. With its powerful data processing capabilities, TradeSim can evaluate the historic performance of a given trading system within a matter of minutes and do it with a realistic representation of a real-life trading scenario. Whether a single security or a multiple security portfolio, TradeSim answers the simple question:

    "What would of happened if this system had of been traded in the past using an arbitrary portfolio of securities?"

    Sounds simple - but is extremely complex if not impossible to do with Metastock as it stands alone. However, with TradeSim it is just a simple matter of running a Metastock exploration on a portfolio of securities using your own set of indicators. When the exploration has finished you just simply run TradeSim and analyse the resulting trade data.

    Your system may look good with an expert overlayed on a single chart.

    "But what about it’s real world trading performance?"

    Typically, your system will consist of entry and exit triggers, prices as well as an initial stop loss. These five parameters basically define a framework for a trading system. The trouble with trying to back test a trading system is that the system tester built into Metastock is only extremely limited. As a result, this can give a very distorted view of your potential trading system performance. TradeSim addresses all of these issues whilst exploring new ground in technical analysis and uncovering new issues that have not been addressed by current software technologies.

    Remember, no matter what back tester you go for, anything that sounds too good to be true will attract the attention of a trader who is not satisfied with their own trading system. This due to the fact that they have not properly tested their system in the first place and have not built up the necessary confidence needed to successfully trade it.

    In the end, these negative subconscious thoughts will only hinder and destroy your ability to trade successfully. To improve your confidence in your trading system you need to thoroughly and objectively back test it - simple as that! Only then will you be confident enough to commit time and money to it! By testing your system, you have just put yourself into the top 1% of traders.

    -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
    David Jenyns is recognized as the leading expert when it
    comes to MetaStock & designing profitable trading systems.

    His MetaStock website offers a huge free collection of trading
    related tips and tricks. Gain free access now.
    Click Here ==> http://www.meta-formula.com/subscribe
    -=-=-==-=-=-=-==-=-=-=-=-= -=-=-=-=-=-=-

    high-end home cleaning Morton Grove ..
    In The News:

    Aigen's Element robot uses solar power and AI to provide farmers with a sustainable alternative to herbicides, working efficiently in cotton and soy fields.
    Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.
    Cybercriminals accessed Medicare data of more than 100,000 Americans by creating fraudulent accounts, prompting CMS to deactivate accounts and issue new Medicare cards.
    China's battery swap technology from CATL lets electric vehicle owners exchange batteries in under two minutes, with plans to expand to 1,000 stations across 31 Chinese cities by 2025.
    Analysts at Silent Push have uncovered a widespread scam that uses counterfeit retail websites to steal the credit card information of online shoppers.
    Chrome users need to update their browsers immediately as Google addresses a critical vulnerability that hackers are actively exploiting. Additional security measures are recommended.
    A study found teens glance at phones for dangerous two-second intervals while driving, using devices primarily for entertainment, texting and navigation despite crash risks.
    Security researchers uncovered a flaw in Windows 11 that allows attackers to disable Secure Boot using Microsoft-signed tools, requiring manual updates to protect against bootkits.
    Carnegie Mellon's noninvasive brain technology allows users to move robotic fingers by thinking about the motion, offering new possibilities for people with motor impairments.
    Multi-factor authentication (MFA) adds an extra layer of protection to your accounts. Instead of relying only on a password, MFA requires you to verify your identity using two or more methods.
    Scientists from Duke, Harvard, and the University of Otago have unveiled a game-changing tool called DunedinPACNI. It uses a single AI brain scan to reveal how fast a person is biologically aging.
    A disturbing wave of fake agent phone scams is sweeping across the United States, catching people off guard and draining their savings.
    Emojis aren't just playful add-ons; they're powerful tools for building stronger connections in our increasingly digital world.
    Google has taken a major step toward the future of clean energy by partnering with Commonwealth Fusion Systems (CFS), an MIT spin-out working to build one of the world’s first commercial fusion reactors.
    If you create and share art online, you might have seen messages warning that Facebook's parent company, Meta, claims the right to use or even sell anything you post, whether it's pictures, poems, or artwork.
    Cybercriminals hit Qantas in a major data breach that exposed information from up to six million customers.
    Having reliable, loud, and timely emergency alerts on your phone or device is important because when severe weather strikes, every second counts.
    Here's how your daily brew is becoming the foundation for greener buildings.
    Artificial intelligence (AI) and large language models (LLMs), such as ChatGPT, are transforming how we learn. But what does this mean for AI and learning retention?
    Modern AI data centers use much more electricity than traditional cloud servers. In many cases, the existing power grid cannot keep up. One innovative solution is gaining traction: repurposed EV batteries for AI data centers.
    Microsoft 365 and Outlook users are being targeted by a tactic that injects fake billing alerts directly into their calendars.
    Researchers are now showing us that old smartphones as data centers could be the next big thing in sustainable tech.
    Scientists have created micro-robots for sinus infection treatment that can enter the nasal cavity, eliminate bacteria directly at the source, and exit without harming surrounding tissue.
    Let's examine how your data is collected in everyday life, who is buying and selling it, what happens to it afterward, and, most importantly, what you can do to protect yourself.
    Researchers at the University of Sheffield in the U.K. developed small robots called "Pipebots" that can travel inside water pipes to find and potentially repair leaks, all without any excavation.

    8 Penny Stocks to Avoid

    There are many good penny stock investments available, which could... Read More

    Bull or Bear?

    Cat or dog? Maybe Zebra. Shucks, I don't know, but... Read More

    Mindset

    In 1960 an engineer working for a watch company in... Read More

    Stocks & Oil, Sat Jun 18th, 2005

    Both the stock market and oil prices rallied recently, which... Read More

    Trading Tips No 2: The Big Lie in the Stock Market

    It is commonly reported that the stock market averages about... Read More

    Mutual Fund Expense Lies

    When purchasing mutual funds we are cautioned to read the... Read More

    Stock Options Trading Strategies - Lean

    Professional stock options traders use the term lean to refer... Read More

    Dividend Reinvestment Plans: Investing on Automatic Pilot

    If you're like many investors who squander those small dividend... Read More

    Two for the Money

    Look back over the years and try to remember how... Read More

    I Love To Lose Money

    Well, not really. What I mean is I don't mind... Read More

    Forecasting the Stock Market

    Every day I see in the financial section of newspapers... Read More

    Mutual Funds: The Modern Den of Thieves!

    Mutual funds were created with the idea that one person... Read More

    Exchange Traded Funds Primer

    Exchange Traded Funds (ETFs) are a group of passive index... Read More

    Buy Low - Sell High

    Now where have I heard that before? I know. It... Read More

    Structured Settlement; Lawyers in NY and Mutual Funds

    Minority Report the movie may not be far off if... Read More

    An Old Proverb for Investing

    "If you don't know where you are going, any road... Read More

    Investment Lawyers and Trash Stocks

    The trash business in its efforts to cook their books... Read More

    Investing in Stocks and The Game of Monopoly

    To begin, you might look at playing the stock market... Read More

    Investment Capital Gains

    Have you bought any mutual funds this year or late... Read More

    No Load Mutual Funds or Exchange Traded Funds (ETFs)?

    If you are fed up with early redemption charges and... Read More

    Buying Stocks and the Importance of Correct Timing

    An investor can find and research the best stock on... Read More

    Political Investing

    We have two candidates for president that have really different... Read More

    Downdraft

    For the year 2000 we have seen hundreds of mutual... Read More

    Trading For A Living - Part 1

    There can't be many traders who haven't at least considered... Read More

    Stops Make Money

    During the day I watch CNBC-TV, the stock market channel.... Read More

    spring cleaning service Buffalo Grove ..