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Backtesting Vs Live Trades
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Backtesting Vs Live Trades

  #1 (permalink)
Elite Member
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Backtesting Vs Live Trades

Lets say you've backtested accurately and then live traded the same strategy accurately; Do you find the backtesting usually comes close to your live trading?

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  #2 (permalink)
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  #3 (permalink)
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Depends of your strategy, i explain:
When testing a scalper strategy , the back-test its usually bad because it does not have a accurate way to simulate slippage (and/or spread) so because with scalping that variables can affect more deeply your strategy you will see more differences in between real life and backtest,
now for other kinds of strategy's you will find differences but you can trust more what you see, Also the backtest its only for testing the algorithm (in my opinion ) , so let your strategy run for weeks and then make the analysis and your improvements.
Sorry my English . Happy trading.

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  #4 (permalink)
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I really appreciate you took the time to respond

I'm trading mostly stocks with a very clear set of entry and exit rules and custom indicators, I've backtested them manually (as if I were trading them) for a 12 month period, using the stocks on my list. Also in the process of back testing them using options, using the think back feature with TOS. it's tedious work; the results are amazing - I was stunned to find that one strike difference can mean loosing $200 or winning $500. My plan is to start trading futures and forex by the end of the summer - but I don't trade anything until I have a plan , rules, system with back testing so I have a lot of work ahead of me yet. I was just curious as to how my much you can trust backtesting results, if done correctly - since going forward, its just a probability. I'm going to backtest again over the time I've traded my system and do a comparison study; I'm sure I will gain moire insight from that as well.

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  #5 (permalink)
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Its great that you have all clear, and you understand the importance of having your rules, the last things that i recommend its to be aware of the physiological factor of real trading, i mean, you will find that with real money you will start be to much confidence an so risking more money or if you loss the first two trades for example you have doubts about your system, so dont evaluate or get to much exitied after the first 10 trades so you can say there was 6 good trades and 4 bad trades , my system its good !!.
Happy trading

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  #6 (permalink)
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Lysakat View Post
I really appreciate you took the time to respond

I'm trading mostly stocks with a very clear set of entry and exit rules and custom indicators, I've backtested them manually (as if I were trading them) for a 12 month period, using the stocks on my list. Also in the process of back testing them using options, using the think back feature with TOS. it's tedious work; the results are amazing - I was stunned to find that one strike difference can mean loosing $200 or winning $500. My plan is to start trading futures and forex by the end of the summer - but I don't trade anything until I have a plan , rules, system with back testing so I have a lot of work ahead of me yet. I was just curious as to how my much you can trust backtesting results, if done correctly - since going forward, its just a probability. I'm going to backtest again over the time I've traded my system and do a comparison study; I'm sure I will gain moire insight from that as well.

The best resource I know of is the book "Way of the Turtle" by Curtis Faith. It is written with LTTF systems in mind, but there is a chapter on results after the back-testing period. The TradingBlox forum, which is also a LTTF resource, also has some of useful posts on the matter. Unfortunately the TradingBlox forum is not as active as it used to be, so you may need to search through the threads.

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  #7 (permalink)
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I have both books on the turtle traders and haven't finished reading them but yes, a very good read! I'm doing everything I can to avoid the noob mistakes that experienced traders have listed - so I place my trades according to my system no matter what to avoid making emotional decisions. I must say for long term its a bit too early to tell, but I have real results - profitable results - trading my system - quite similar to my backtesting results, I'm quite pleased so far. I have used the thinkback in TOS to fine tune my option selections, it's helped quite a bit!

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  #8 (permalink)
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I think it's all about how pessimistic you were in your backtest rules, I usually find my real is better but only because I'm very pessimistic in my backtest

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  #9 (permalink)
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The goal for any back test should be 90% or better accuracy in simulated trades vs live fills. This can be done by using accurate commissions, slippage, and understanding the limitations of your back test engine. Being overly pessimistic or overly optimistic is a mistake, you should try to be as accurate in assumptions of the market as possible. But in general it is safer to be overly pessimistic.

Back testing and modeling of trading strategies comes down to 2 essential types of assumptions 1) assumptions about the markets and its micro structure 2) assumptions about the type of activity that is exploitable to generate alpha. You must make both assumptions as close as you possibly can to real life as possible. The more off you are in your base assumptions the more off your back test will be, and that is completely human/user error. No institutional grade software, back tester can help you fix this.

In regards to strategy type affecting back tests, this is just a falsehood. It is not the strategy that is affecting it, it is the poor back tester. Most people are using tradestation, ninja trader etc. These are not very robust back testers and were not built to handle intraday or scalper type strategies. They are based around the idea of re hashing common technical indicators and using longer time frames. Just you need to choose the right tool for the job. The backtesting engines in Tradestation or Ninja are just not the right tool.

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I started out trading historical data on currencies using forextester, probs a year ago. I was profitable pretty much every session I did and each session had maybe 100-300 trades and I did quite a few sessions. Flip it to live and it was completely different... why? Well with my software I could load up 5 minute candles with the click of my mouse... get in with my signal and no need to wait you either win or you lose then you fast forward and next trade. Live you are receiving data tick by tick, and when you get emotions in the line and you become fearful or angry or whatever it clouds your judgement and you can do dumb things. So backtesting w/ fastforward option is psychologically even easier than sim trading. So if you do something similar where you can just fast forward data, take that into account.

Understanding yourself is just as important as understanding markets.
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