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?
I am completely new to using NT software and I was running through some youtube videos to try and get a hang of programming. I came across a video made by Big Mike where he programs a simple strategy. He then backtests the strategy and it proves to be profitable. However he says not to bother with this strategy, as it is not actually profitable in real practice. How can this be? I know some indicators can have lagging signals, but wouldnt running a backtest also take the lagging signals into consideration? Do lagging signals even matter in this case or can successfully-backtested strategies not be profitable for other reasons? Thanks for the explanation in advance.
This post has been selected as an answer to the original posters question
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.
Also consider being filled...on Tradestation there is an option to add slippage and a number or percentage of shares before being filled. This would provide a little more real world analysis.
If the backtest was preceded by an optimization process to select strategy parameters, then over fitting is quite likely a reason why backtest results would not be at all reflective of live results.
Volatility of price action is not recorded in the data used for backtesting. Wild swings up or down can trigger many signals in live trading, but these same signals may not fire at all in backtesting.
Considering this, I do find decent backtesting with Multicharts if you set the option to use tick data. It does not work on specialty bars like renko or line break and other specialty bars. But I do find it to be very good on time and tick based charts.
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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.
