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 Post subject: Credibility of Backtesting?
PostPosted: Thu Jan 15, 2009 1:03 pm 
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Joined: Sat Jan 10, 2009 2:06 pm
Posts: 4335
Location: Canada
ImageIs there any credibility to backtesting to determine if the same set-ups or strategies will work in the future?

Can you look at past results and charts etc. etc. and determine with any kind of reliability of what will happen in the future?

______________________

First of all, backtesting is needed to confirm if you have a positive expectancy in your strategy. Therefore, if backtesting shows you that your method will lose money, it would be a poor decision to trade that method with real money even if it was via a small size because the psychological aspects of losing money could have a negative impact on your ability to be properly prepared to trade in the future.

Further, if your backtesting results are positive (profitable), it still is not a good indication if you will be a profitable trader when you do trade with real money.

To determine more realistically your profitability is to go to the next level of testing and statistical work via Simulator Trading.

However, don't simulate trade beyond the duration you need to collect enough data to determine if you need to fix a particular aspect of your trading or if your ready to traverse to real money trading.

Then, only then, real money trading will show you your ability to follow your trading plan because discipline has a huge impact on your trading results when you compare them to your simulator results and backtesting results.

The combination of backtesting, simulator trading and the initial phase of real money trading should give you realistic trading goals.

My point is that too many newbie traders and many system designers in error use backtesting results as the sole indicator of their future trading performance and goals.

Simply, backtesting results do not (unable) to duplicate how traders react to the markets in real trading conditions with real money on the line...

Backtesting assumes that traders will not have discpline problems, will not have computer problems, will not have data vendor problems, will not have trading execution platform problems, will not have ISP problems, will not have stressful problems in personal life of the trader et cetera.

Once again, the combination of backtesting, simulator trading and the initial phase of real money trading should give you realistic impression of where your current trading is at and that will help you set more realistic trading goals.

Last of all, if you want to understand the price action that you will be backtesting...manually backtest if possible instead of a computer code to help develop a better understanding of the price action involving your method along with having a better understanding of the nuances involving your trade signal or trading approach.

Regards,
M.A. Perry

Phone: +1 708 572 4885
Business Hours: 8am - 5pm est (Mon - Fri)
Skype Messenger: kebec2002
questions@thestrategylab.com


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