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How can a strategy be profitable when backtested but not when actually used?
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How can a strategy be profitable when backtested but not when actually used?

  #11 (permalink)
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shanemcdonald28 View Post
quote "huh"


Well if the data being used for backtesting only has the open, close, low and high data, then the buy and sell signals will be totally different than live tick by tick data .

In another scenario, a strategy that uses volume rate of change, would not trigger buy and sell signals in backtesting in the same way as live data.

Also, volatility expansion type signals will fire on live data much differently than backtesting.

A macd crossover on a daily chart would not matter much I suppose.

This is false.

All of the above work fine with backtesting. Simply use tick data.

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  #12 (permalink)
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Are you saying that historical tick data and live tick data behave the same ?

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  #13 (permalink)
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shanemcdonald28 View Post
Are you saying that historical tick data and live tick data behave the same ?

I am saying ...


shanemcdonald28 View Post
Volatility of price action is not recorded in the data used for backtesting.

This is false.


shanemcdonald28 View Post
Wild swings up or down can trigger many signals in live trading, but these same signals may not fire at all in backtesting.

This is false.


shanemcdonald28 View Post
Well if the data being used for backtesting only has the open, close, low and high data, then the buy and sell signals will be totally different than live tick by tick data .

So use tick data instead of minute or daily data. It's simple, if you want more accuracy then increase the resolution of your data.


shanemcdonald28 View Post
In another scenario, a strategy that uses volume rate of change, would not trigger buy and sell signals in backtesting in the same way as live data.

This is false.


shanemcdonald28 View Post
Also, volatility expansion type signals will fire on live data much differently than backtesting.

False.

My point being, I don't agree with anything you've said. Now anyone that reads my posts know that I routinely talk about all the pitfalls of backtesting, so don't misconstrue my meaning. But what you've described here is not accurate, not unless you are purposely making it inaccurate by using minute or daily data.

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  #14 (permalink)
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Ok, sounds good.

Now that you have negated everything I have said about backtesting, can you offer an answer for the original question that was posted ?

The original poster wanted to know why a strategy that backtested good should not be used in live trading ?
He was referring to a video that you made about automated strategies.

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  #15 (permalink)
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shanemcdonald28 View Post
The original poster wanted to know why a strategy that backtested good should not be used in live trading ?
He was referring to a video that you made about automated strategies.

Refer to the below webinar:

5 Ways to incorrectly build a system

Diversification is the only free lunch
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  #16 (permalink)
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shanemcdonald28 View Post
The original poster wanted to know why a strategy that backtested good should not be used in live trading ?
He was referring to a video that you made about automated strategies.

Done.


tturner86 View Post
Past performance is not indicative of future results.


kevinkdog View Post
There are ways to trick the backtest software. Also, if you heavily optimize, your results will never be the same going forward.


Hulk View Post
Other factors are that fills and slippage are not accounted for correctly in most backtests. The strategy may report an order filled at the price determined by the strategy but in reality, the order may not get filled (if limit order) or may slip against the trade by a tick or more thereby invalidating the strategy results. So you are looking at trades that the strategy reports that a trade entry got filled but in reality you may not get the fill or it may report that a trade exit got filled but in reality it may not etc. You could set some backtesting software to report fills only if the entry price is pierced but that leads to the same result - price may not pierce but in reality you could get filled etc.


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  #17 (permalink)
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shanemcdonald28 View Post
The original poster wanted to know why a strategy that backtested good should not be used in live trading ?
He was referring to a video that you made about automated strategies.

There are many reasons. I suggest watching all the webinars in the archive about automated trading, they answer the question and provide many hours of detail, something I am not going to do right now in this post.

Mike

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  #18 (permalink)
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The past has occurred and reviewing it is of itself a non-real "constant". Back testing is vastly different than the live market.

Who really knows what's gona happen on the right hand side of the chart - if you did this game would be over.

We can therefore only hypothesize based on past behavior with some best/educated "guess" indication of direction based on volume, price, orders flow, news, etc... In back testing you know what's gona happen.

Further more what something (notice I did not say just someone) categorizes as a "buy" may and is in fact justifiably a "sell" from another point of view (someone buys from a seller and someone sells to a buyer) - think of time frames, chart types, fractals...it absolutely a multidimensional dynamic environment. Again in back testing this is fixed.

While it may on the onset appear to be similar to some form of higher math, curve fit, 5th order differential equation, etc...the fact is movement still relies some one/thing/computer to determine it's time to pull the trigger. The entire system "can" and does change state instantly. Watch it, you will see things just happen. For example someone with a large interest needs cash and does not care, they just want out - they sell a sload, what happens? My view is how fast can you react when you see these things. These occurrences don't just pop up in back testing.

Now think about the word "instantly"... with todays computers and networks, things happen so fast that a booked limit order placed in Chicago on a local hosted server running on a direct 10gig connection to the CME can fill before you on your DSL line in Los Angeles even know it was booked. Depending on your back testing data granularity, you may or may not see things at this sub-second level.

Very importantly, there is never the same exact players in the market at the exact same levels, at the exact same times - ever. In back testing this aspect is a constant.

All of this is why something that works in back testing does not work in the live market as it did in back testing.

This does not mean that back testing is bad, just that nothing in this game is ever exactly the same, the only constant is change.


Last edited by tulanch; June 12th, 2014 at 08:01 PM.
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  #19 (permalink)
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HI Big Mike and folks.

Long time out.

About the discussion, a had not the time to whatch the webinars yet, but one thing tha puzzles me and I never read any coment about, but found ruge diference between life and backtest results acording to the data you use on the backtest. I got huge diference using diferent data sources and another huge diference in results using data adjusted for dividends a data not adjusted.

I think when you use a adjusted data, the result of your backtest reflects two efects: it's like you received all the duvidends and the price is distorted.


Last edited by ecredic; June 13th, 2014 at 08:50 PM.
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  #20 (permalink)
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For a backtest to be reliable it need to simulate live trading conditions.

The simplest example I can give is the use of a moving avarage as some kind of resistance.

Let's say you want to buy when prices are above the MA and it touchs the same MA. The buy price will be at the exactly point where price touch the MA.

In such conditions, if you tell the back test to calculate "previous low > MA AND actual low <= MA", the buy price registered in the backtest will be out of reality. You must tell the system to estimate the exactly point where the MA will be when price touch it.

Then it would be a reliable backtest.

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