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
-=-=-==-=-=-=-==-=-=-=-=-= -=-=-=-=-=-=-

cleaning service near Deerfield .!

In The News:

A fake Amazon invoice charging $988.18 for an iPad lists the same customer support phone number three times to steer panicked victims into calling.

A handful of food delivery robots from Uber Eats and other platforms have gotten kicked and knocked over in Philadelphia and Los Angeles.

Data broker opt-out forms may not protect your family. People search sites can still expose your info through a spouse's or parent's profile.

Apple's first touchscreen MacBook Pro starts at $2,899 with a PROLED XDR OLED display, but the non-touch M6 model costs $900 less at $1,999.

Black Friday deals are already drawing scammers who use fake delivery notices and gift card payment requests to steal your personal financial information.

Apple's iPhone Duo reportedly outlasted the Samsung Galaxy Z Fold 8 by over three hours in battery tests, but its weight and repair costs raise concerns.

Florida Polytechnic University's Jetson ONE eVTOL police vehicle named Astro still awaits FAA authorization before officers can fly operational patrols.

OpenAI's new locked chats feature lets you protect ChatGPT conversations with a PIN, Face ID or Touch ID, but there are key privacy limitations.

A phishing email disguised as an Evite fooled a man even after he emailed his friend to verify it, revealing how compromised Gmail accounts aid scams.

Microsoft's AI diagnostic system identified 83% of complex medical cases in a study, more than doubling the 36% accuracy of generalist doctors.

Account takeover threats go beyond stolen passwords as criminals exploit session cookies, SIM swaps and MFA fatigue to bypass your login security.

SpaceX is reportedly pursuing access to 80,000 cell sites to turn Starlink into a major wireless carrier rivaling Verizon, AT&T and T-Mobile.

Tech advocacy groups warn that foreign nationals at AI companies like OpenAI and Google pose a national security threat amid a lack of federal oversight.

Singapore researchers built the world's first touchscreen woven into clothing, surviving 50 machine washes while displaying images and responding to touch.

The Fox News AI Newsletter covers the latest artificial intelligence technology advancements, including the challenges and opportunities AI presents now and for the future.

A startup founder woke to $449 in unexpected OpenAI and Anthropic charges after stolen API keys were exploited during the "Black October" cyber wave.

Educational Testing Service hackers stole millions of California student records, but families who moved out of state years ago may also be affected.

Apple's iPhone Duo screens are cracking near the hinge just days after its $1,999 launch, and iFixit's CT scans may reveal what's going wrong.

Travel expert Katy Nastro says 50,000 American Airlines AAdvantage miles vanished from her account after someone redeemed them without permission.

Google AI Overviews can't be permanently turned off, but adding -AI to your searches and using the built-in Web filter can help bypass AI summaries.

Attaxion researchers found 30 fake Texas campaign merchandise stores traced to just two sellers hawking gear for competing Republicans and Democrats.

GM plans to debut eyes-off driving in the Cadillac Escalade IQ by 2028, but safety testing reveals how long distracted drivers take to regain control.

Data brokers assign labels predicting your health, finances and religion based on browsing and purchases, then sell those profiles to businesses.

Elon Musk says he'll give one SpaceX share to every kid in America in 2027, but key details about eligibility and distribution remain unclear.

ClearSpace UK's robotic spacecraft with giant claws will chase down dead satellites at 17,000 mph, with a 2029 launch from Scotland planned.

The Secret Art of Backtesting

Stocks & Mutual Fund