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If the past isn't indicative of the future, why do people back-test?
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If the past isn't indicative of the future, why do people back-test?

  #1 (permalink)
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If the past isn't indicative of the future, why do people back-test?

Is back-testing really necessary to develop a consistently profitable trading strategy?

With that being asked, I went way back in time on the ES and noticed little volume and volatility- compared to now at least. 20-40 point range of movement in a day, if even. Within the past couple of years though, volume and volatility are at an all time high. Is there any merit in going back in time (like 2004-2012), where market conditions were obviously different (climbing bull market for the most part) to determine credibility of a strategy? Has anyone here pondered deeply about the utility of back-testing in general?

If you think back-testing is absolutely necessary, please explain why. Maybe the past actually is indicative of the future to some degree. I just want more information on this.


Last edited by Zachary Standley; October 29th, 2018 at 04:53 PM.
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  #3 (permalink)
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Zachary Standley View Post
Is back-testing really necessary to develop a consistently profitable trading strategy?

With that being asked, I went way back in time on the ES and noticed little volume and volatility- compared to now at least. 20-40 point range of movement in a day, if even. Within the past couple of years though, volume and volatility are at an all time high. Is there any merit in going back in time (like 2004-2012), where market conditions were obviously different (climbing bull market for the most part) to determine credibility of a strategy? Has anyone here pondered deeply about the utility of back-testing in general?

If you think back-testing is absolutely necessary, please explain why. Maybe the past actually is indicative of the future to some degree. I just want more information on this.

Think of it a different way...

OK, let's say you do not historically test your approach, whatever it may be. How do you know the method is any good?

Let's say you have an entry based on XXXXX, with a stop loss of Y and a profit target of Z. If you never have evaluated or tested it, how do you know it works (or not)?

With backtesting, you can at least see if that approach worked historically. Does that mean it will work going forward? Not necessarily, but which choice do you prefer:

A. Trade a strategy that has historically worked
B. Trade a strategy that you have no idea if it worked historically or not

The option you choose will tell you if you should backtest or not.

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Zachary Standley View Post
Is back-testing really necessary to develop a consistently profitable trading strategy?

With that being asked, I went way back in time on the ES and noticed little volume and volatility- compared to now at least. 20-40 point range of movement in a day, if even. Within the past couple of years though, volume and volatility are at an all time high. Is there any merit in going back in time (like 2004-2012), where market conditions were obviously different (climbing bull market for the most part) to determine credibility of a strategy? Has anyone here pondered deeply about the utility of back-testing in general?

If you think back-testing is absolutely necessary, please explain why. Maybe the past actually is indicative of the future to some degree. I just want more information on this.

You're making an excellent point here. Things do change; going back years is probably not the answer. How bout staying closer to home, say a month or a quarter. Then it's like a MA, most important data is most recent data. Personally gave up on BT because the systems were difficult to use or gave poor results. If you have one that you're confident in, why not compare him with Forward Testing. Lots of solid demo systems around. Fwd testing for a week or a month seems a lot more practical.

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Every year there are Black Friday sales. You can't predict with certainty what will be discounted, but you can make an educated guess based on historical evidence.

Same with backtesting.

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  #6 (permalink)
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I think OP mixed up 2 different things, trading results and history. History always repeats itself but your trading result doesn't...

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How else would you know that you might have something worthwhile?

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The ATR on ES is at a historic high right now, but as a percentage of the daily close we've seen these levels before. So there have been similar market conditions to this one in the past. You may not be able to guarantee the future, but why wouldn't you want to know what worked in the past in similar market conditions, you know what I mean?

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Zachary Standley View Post

I went way back in time on the ES and noticed little volume and volatility- compared to now at least. 20-40 point range of movement in a day, if even. Within the past couple of years though, volume and volatility are at an all time high. Is there any merit in going back in time (like 2004-2012), where market conditions were obviously different (climbing bull market for the most part) to determine credibility of a strategy?

If you believe Daniel Kahneman, he says intuition doesn't work with trading - it's an "illusion of skill". He later says to maximize predictive accuracy, final decisions should be left to formulas, especially in low-validity environments.

More data is generally better than less.

As you pointed out above the market constantly changes. Volume and volatility won't stay this high forever. Then what?

Two approaches are to identify historical regimes, and backtest only within those regimes. So you will switch strategies on/off when the market changes.
Alternatively develop strategies with data from all regimes, and review performance within each regimes. Something that performs across a range of regimes will give you further confidence the strategy will work going forward.

Read @kevinkdog thread, so you learn to back-test well from the start - and avoid a lot of wasted time and mental roller-coasters.

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"We look into a mirror darkly".
History may not be the best way but we can't see the future so it is the best we have.

Also, looking back to go forward may be imperfect and you may stumble at times.

If you try driving a car with the windshield covered and only use the mirrors, you can be somewhat successful.
However, you must go slow and when you see you are going off the road, correct your path.
If you try to go fast, you will hit something or end up in a ditch but a slow, steady movement forward looking in the mirrors and out the side(present) tells you a lot about the road ahead.

The trip will not be without incidents but driving this way does not mean it has to plunge off a cliff.

FWIW

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Knowing it's not about Clouds or Wind. . .
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