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Absolute vs. percentage price change in backtesting

  #3 (permalink)

charlotte nc
 
Trading Experience: Master
Platform: ninjatrader
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Posts: 379 since Jan 2015
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Here is the approach I recommend taking to get the answer.


Hi Thatsbooo,

What you are attempting to do is determine which "bet" will pan out the best. But in order to know which one will pan out the best you will need to do some research. The type of data and analysis you need to research this "bet" is:

1. For your given instrument get the raw price data for a few weeks or a month or two. You don't need to burn your self out too much at this point, since this is only a proof of concept validation as a first step.
2. For each day you need to extract the high and low and a full range of data. Maybe hourly, or minute data even...
3. For each day you need to determine if it broke the previous days high or low
4. For each day that broke a previous days high or low, you need to carefully analyze the following:

A: What did it do exactly, was this a trigger for a trend, or just an arbitrary price point that kept getting crossed from both sides.
B: If it did break the high or low did it pick up at least x number of ticks. You can define this.
C: If it did break the high or low, (This is the part you want to test) and it hit some predetermined value (Either your target tick value or target % change) then what happened next.
D: From C Above: Here is where you need to draw a hypothesis and test it such as: I think that if today breaks yesterdays (High or Low) and then moves X amount of ticks, or Y percentage, then Z will occur.
E: From D Above, you need to test your hypothesis and see if you were right or wrong. If you were right considerably more than you were wrong you may have an edge to your bet, but if this is somewhere around 50% / 50% then you don't have any edge with this idea / setting / exact bet, etc.

There is no shortcut you could take to get a quantifiable answer other than doing this in my opinion. The good news is this process is straight forward and can be done in excel in a few hours.

Just be careful to not only look at the potential positive outcomes (I.E did your bet occur the way you are hoping), but also look for any opposite moves that would likely trigger a stop loss. For example, if you are betting that if a price break implies a 20 tick up move, did you end up getting a 20 tick down move also. You can get both of these... and if this is the case you can not just assume the positive outcome without considering the negative outcome as well.

Bets of luck!

Ian





Thatsbooo View Post
Hi all,

I trying to develop a breakout strategy with a breakout of yesterday´s High/Low + an additional value.

Now, the additional value should I test it with a absolute price change in Ticks or as a percentage price change?
e.g. Entry Long on Yesterday´s High + "n Ticks" or Entry Long on Yesterday´s High + "n%" ?

I feel insecure when it comes to test price changes on back-adjusted continuous contracts. Which way is more
reliable, absolute or percentage price change?

Thanks!


In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
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