Treydogg999 - Thus far I've come quite close to the 90% in live trading. I don't use a backtest engine yet - its all done manually - which I would recommend for any beginner. Yes, it's painfully tedious but you really learn your instruments and techniques. I will be using a backtesting engine at some point - if I want to just modify a technique, I don't want to spend a week backtesting it manually! I've been spending some time getting to know multicharts and it shows some real promise, although there doesn't seem to be anything that does well with using options. I think I will have to backtest my basic strategy and then backtest using options under a separate test. I believe after all the manual backtesting that it is the life blood of successful trading; after all, its nothing more than a game of statistics, and the only way to know if the odds are in your favor is to test those odds as accurately as possible - even if this means doing it manually and entering it all on a spreadsheet! Since I started this thread I have learned a lot even though it wasn't all that long ago.
The following user says Thank You to Lysakat for this post:
TickedOff - I appreciate our response! When I started trading my system live after backtesting the hardest part was to enter trades and follow my risk management rules exactly as I had tested them - it took tremendous self control! I was really afraid that I would find out my backtests were inaccurate. Things can go wrong and get overlooked - I'm grateful I just did it manually so while I was testing I was able to refine and learn about hows to trade it as well.
You will also find that even with a proper backtest, your live results may not mirror the results accomplished in your backtests. Just part of the ever-changing nature of the markets, and it does not mean your backtests were inaccurate.
I notice you don't have a backtesting engine. If you are handy with the "if" function in excel, you can set up your own backtesting engine. The reason I would recommend this, is that it becomes very easy to implement out-of-sample testing on your system. However, it takes a significant investment of your time, and you would need to be extra careful to ensure that the backtest formulas do not have any errors in them. Really annoying to see great results only to realise you had a bug in your code.
I am in the same boat and have done many backtest and optimising and just started a thread and then saw yours
for stocks, I didnt get even "real time trades"closer to backtest ones, they are quite diff
I love this point and that's very true.
how can you reproduce a +PnL from the the last 6months to the next 6months? that's impossible.
nobody or backtest results know what is going to be in the next 3 or 6months based on previous backtest results
Going through these responses, it appears that there is a fundamental misunderststanding of what backtesting is supposed to be and therefore how it's carried out. Even if backtesting is done properly, there are a number of steps between the backtest and live trading: observation, backtesting, forwardtesting, simtrading, live trading. And lurking in the background is fear: the fear of being wrong and the fear of losing money. If one jumps from backtesting to live trading, that fear will exert a stranglehold. Even if one goes through all the steps, fear may still have some influence, but the more confidence one has, the less influence fear will have.
The following user says Thank You to DbPhoenix for this post:
A system consists of (a) a set of rules that you use to select profitable positions and (b) a set of rules that you use to manage the trade once you're in it (again, whether you call it a system, a method, a strategy, a plan, a scheme, an approach, a procedure, or a modus operandi is not as important as sitting down and doing it).
• Developing a system begins with deciding just what it is you're looking for. Therefore, begin by studying price movement1 in real time (or at the end of the day through "replay", if your charting program offers it). By "study", I mean to observe it with intent, not just read about it or listen to somebody talk about it. You have to understand what you're looking at before you know what to look for. Note the conditions under which price rises, falls, drifts. Make every effort to avoid imposing your biases onto what you observe. You may see trading as a war, a competition, a game, or a puzzle. You may think you're out to kill somebody, outwit somebody, or are out only to detect the flow and slip into it, riding the waves as if you were sailing. None of this should be allowed to affect what you observe.
• Develop a set of preliminary hypotheses which exploit the profit opportunities presented by these movements, e.g. price began trending "here". Price broke out "there". Price reversed "there". What can I do to take advantage of that? What do I have to look for?
• Decide what strategy will best take advantage of what you think you've found. Are you looking to catch a reversal in the hopes that it will become a trend? Or are you looking to trade series of reversals within the day's or week's range? Or do you prefer to wait for a breakout and trade what may become a trend? Or would you rather wait for a retracement in what may be shaping up to be a trend? Limit yourself to only one strategy at the beginning.
• Carefully define the setup (the set of circumstances which you define which triggers an entry) which implements this strategy, preferably using old charts (attempting to define the setup by studying realtime charts is inefficient since you don't yet know what it is that you're looking for). This is called "backtesting"2[Note: I don't necessarily agree with the definition of "backtesting" provided in the pop-up]. All else flows from this. Unless you know what you're looking for, you cannot test it, much less screen for it. If you have not tested it, you have no idea of the probability of its success. With no idea of the probability of success, any trades made are essentially guesses.
Therefore, focus on the setup. One setup. Determine its characteristics, find the markers of buying and selling interest, buying and selling pressure, buying and selling exhaustion. Define it so specifically and so thoroughly that you can recognize it without any doubt whatsoever in real time. Decide provisionally where best to enter, what the target ought to be, where the stop should be placed, and so on. Only after the setup is defined and tested (and it can't, ipso facto, be tested until it's been defined) can one even begin to think about trading it with real money, much less trading multiple setups. Attempting to shortcut this process merely expands the amount of time it will take to develop the necessary skills. Nothing is gained by painting the house before scraping it, cleaning it, and priming it since you'll have to do it all over again sooner rather than later.
You are free to create your own based on whatever jingles your bells. You may, for example, focus on divergence. Or higher swing lows and lower swing highs. Or candlesticks of one sort or another. Or trendline breaks. Or base breakouts. Doesn't really matter. What matters is that you keep four concepts in mind: demand/supply, support/resistance, price/volume, and trending/ranging. In this way, you can create your own setups which hundreds of thousands of other traders won't be watching along with you. You must understand, however, that what determines the success of the trade is the trader, not the setup. If you're looking for something that "works", you may as well save yourself a lot of time and stop right here. What will “work” – or won’t, as the case may be – will be you.
• Forward-test what you have so far, again using old charts, preferably replaying them (if replay is not available to you, then scroll through them, bar by bar). In other words, "pre-test" the setup. Make whatever modifications are necessary to the setup, i.e., re-examine and re-define your strategy. Address risk management, trade management, money management in further detail. Determine the ratio of winning trades to losing trades (you will, of course, have to define "winner" and "loser", which is where risk management and trade management come in). Determine the ratio of profit to loss. Determine the maximum loss. Determine the maximum number of consecutive losers.
Note that beginners often use "win/loss" to combine two separate considerations into one, and failing to keep them separate can create problems. One is win:lose. The other is profit:loss. Between the two, the "lose" and the "loss" have two distinct meanings. Win:lose refers to the ratio of winning trades to losing trades. Profit:loss means, expectedly, the ratio of profit to loss.
You'll read that the % of winners can be less than the % of losers as long as the winners are sufficiently profitable, one's management is superior, etc. And, yes, theoretically, one can "win" less than 50% of the time if his profits sufficiently outweigh his losses. But if your real-time real-money test begins with a string of the losses anticipated by your backtest, you'll be out of the game almost before it begins. In fact, one can be left high and dry even if his % of wins outnumber his % of losses, as mentioned above, if there is insufficient control of the amount of loss OR if the losses occur in sufficiently high numbers at the beginning of the trial.Then there are commissions and assorted trading costs to take into account, which is why traders who actually trade find that, without size (the quantity of what you’re trading), all the postulations about percentage don't mean much in practice.
• Paper-trade this plan, in a simulated environment, as a semi-final test, until you are satisfied that it performs at least as well as it did during the previous testing phase. This may take several months or more depending on how many trials you perform. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution.
• Trade the plan using real money in real time, spending only what is absolutely necessary on "tools" and trading the minimum number of shares, contracts, etc., allowable. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution. Recalculate your win rate and profit:loss ratio on a continuing basis.
• If your plan is consistently profitable in practice, increase your size to what is a comfortable level, maintaining a continuous loop of re-appraisal and re-evaluation. When things come unglued, back up as far as necessary to regain your footing.
The following 7 users say Thank You to DbPhoenix for this post:
Amazing detail and method to backtest. thks for posting here
I do have a good ATR based system but for me, I need to do more of the last 3 points that you put out here finally
more sim trade, more forward testing, redo the math based on what Pnl and win/loss an all other metrics
You may also find, however, that your "good ATR-based system" isn't as good as you thought it was and you'll be faced with the prospect of starting over. Don't be disappointed if this is the case. It happens. Often. But the re-working and re-working is where winning traders come from (losing traders won't bother, or will give up).