Backtesting And Profitable Strategy Development For Boston Traders

Backtesting And Profitable Strategy Development For Boston Traders – It’s surprising how many traders I’ve coached over the years never backtested. I usually backtest at least weekly, especially when the market is slow, and for good reason.

As a new trader or one who has yet to make a profit, backtesting will not only help build your confidence but also help you determine your strategy better.

Backtesting And Profitable Strategy Development For Boston Traders

Backtesting is the process of analyzing historical trading data to see how a trading strategy has statistically performed in the past.

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Manual Backtesting: Manual backtesting simply involves going through your historical charts candle by candle. There are some key advantages of manual backtesting over others which we will discuss shortly.

Replay Backtesting: The majority of charting platforms offer replays where you can simulate the live market environment based on previous trading data. Usually replay software will collect statistics on the trades you take.

Coded Backtesting: Algorithmic traders backtest their coded strategies by running simulations. While I have written some basic code in the past and traded some successful algos that took advantage of some arbitrage opportunities, this is not my main area of ​​expertise. The remainder of this article will focus on the previous two forms of backtesting.

I personally prefer manual backtesting over replay backtesting. I’ve tried a few different software over the years and they generally tend to be slow and take longer than just manual testing. Replaying can be useful for new traders to get extra repetition, but I find it inefficient for backtesting.

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If you use a simple spreadsheet, like the example we’ll cover in a moment, you can run any test on the data you want. You are not limited by software.

To be successful in this business, you need a well-defined trading strategy and perfect execution. Backtesting helps with both.

Manually backtesting a strategy will help you understand the strengths, weaknesses, and characteristics of the strategy allowing you to better define it.

Additionally, once you have actually backtested a strategy and proven that it has the potential to produce profits, this will help give you the confidence to follow your rules.

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Lastly, it will help you better understand the weaknesses of the strategy. EVERY trader and trading system experiences withdrawals. Learning to lose money is an important aspect of success.

You will start to realize that drawdowns are just part of the random distribution of trades. You will start to see performance in a series of trades, rather than individually.

I can’t even tell you how many emails I receive from failed traders saying that they spent so much money on the strategy they were trading and lost money because the strategy was bad. Why would you ever trade a strategy before backtesting it?

As mentioned previously, you can backtest a strategy using replay software, running simulations on an algorithm, or by testing manually with your charting software.

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TradingView – TradingView is a very popular web-based charting platform that offers a replay option they call rewind.

MotiveWave – MotiveWave is the platform I personally use and from which all the images on the blog are generated. They have a replay function that I know some of our members have used and liked.

TradeStation – TradeStation has always been a leader when it comes to automated trading. TradeStation’s proprietary programming language, EasyLanguage, allows you to design customized indicators and trading strategies using English-like statements.

MetaTrader 4 – MT4 is popular among Forex traders. MT4 has a strategy tester for the expert advisors you code. MetaQuotes is based on the concepts of the popular С++ programming language

The Biggest Backtesting Mistakes You Can Make

I would like to say briefly that the chances of you learning programming and creating a successful trading algorithm are close to zero. I realize that algo trading and the idea of ​​making money while you sleep or without any input sounds sexy, but it’s not.

Big companies will spend millions of dollars to recruit the brightest researchers and programmers, but most of them still fail to develop profitable strategies.

Those who do usually rely on some kind of market manipulation that requires a lot of capital or finding arbitrage opportunities. Additionally, they use the fastest programs, data processing and market connections to reduce slippage which is a weakness for many algo strategies.

I’m not saying it can’t be done, but if you’re new to trading, I wouldn’t start because you’ll most likely just end up going in circles.

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Every strategy is different in terms of instruments traded, entry methods, trade management, risk management so it is very difficult to create a one-size-fits-all software for backtesting.

With Google Sheets, you can manipulate data to suit your analysis needs. Most backtesting software is not open source, so what you get is what you get, which is not the case with plain old spreadsheets.

I honestly feel the same way about trading journals. Everything has limitations. The only limit to Excel or Google Sheets is your knowledge.

Something that is easily solved with a quick search on Google or Youtube. If you want to be a successful day trader, you have to learn on your own, and I highly recommend that you become familiar with spreadsheets.

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To get started, I’ll give you a backtesting template that will cover most of your backtesting needs.

There are several steps you must complete before you can start backtesting. You should complete a trading plan and start a playbook. Your trading plan and trading guidelines should explain:

Go to the first date of your data set and start going through your charts one by one. At the end of each bar, determine whether or not you have setup potential, and why.

The price tried to retest today’s lows but failed and started to strengthen. Above it we have a nice trend line forming which we will use for our entry if we get a candle that closes above it.

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Continue advancing your chart one bar at a time until a signal appears (candle closes above the trend line).

As we progress forward, you can see that we will get an entry at 4, 149.25. According to our strategy, we remain in position until the candle closes below SMA 9 which will result in closing the position at 4, 154.25.

There are many common mistakes made when backtesting a strategy. Use these tips to help you.

This is why I highly recommend you look at the chart candle by candle when backtesting rather than simply zooming out and looking at a larger period to see the setup.

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Your mind tends to play tricks on you. Winning setups will be easier to spot and you’ll usually end up passing on some losers that damage your data.

When I first start testing a strategy, I like to get a minimum of 50 trades covering a 20 day time span.

Of course every strategy is different. Some may only produce one setup per day, and if this is the case for your strategy, you should look at larger data sets.

Once I had made 50 trades, I started analyzing the data to see if the strategy had potential. If so, I don’t change anything with the current strategy, I collect more data. Typically I like to get around 200 trades.

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Once I reached 200 trades, I started optimizing the strategy by testing different trading and risk management techniques. Before implementing a strategy live, I will do about 300 – 500 backtested trades.

Be sure to test your strategy during periods of high and low volatility as well as trending versus range-bound markets.

Your strategy may perform better or worse under certain market conditions. The only way you’ll know is by retesting under different conditions.

You can analyze where you should take your data set from by looking at the daily or weekly charts of the instruments you are testing to find different periods of volatility and trend vs. range limits.

How To Backtest A Trading Strategy

Often traders forget to include slippage and commissions in their results. Commissions and slippage can reduce profit margins by a significant margin.

The impact of commissions and slippage on your strategy will depend on the style of strategy you are testing.

For example, if you backtest a scalping strategy for the eMini S&P500 that has an average profit of 6 ticks, it will be more affected by slippage and commissions than a strategy with a 10-point take profit.

Once you’ve retested and refined your strategy, it’s time to continue testing. Forward testing is simply backtesting the strategy on a simulated account in the live market.

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I recommend you trade a new strategy on SIM for at least 30 days before implementing it live. When trading a new strategy, you need time to learn to identify valid setups as they occur in the live market.

Backtesting will really help you to develop as a trader. You get free repetition

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