Education

Education: Why is backtesting necessary for trading indicators?

Backtesting of trading indicators is necessary because the results displayed by indicators may not match real-life situations.

Although Tradingview is one of the widely used trading platforms with a rich library of technical indicators, some of these indicators may have issues with "peeking into the future." Conducting backtesting is also essential to avoid "future function" problems.

Two common problems related to "peeking into the future" include:
1. Using future data in the calculation of indicators, such as using the opening price.
2. Setting parameters incorrectly during backtesting and testing, may cause the buy signal to be moved by one candlestick.
Therefore, through backtesting, we can ensure that our trading strategies and indicators are reliable.

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Below is a case that illustrates the importance of backtesting trading indicators. The chart shows a strategy I created based on the trendy indicator called "Machine Learning: Lorentzian Classification" on Tradingview.

As seen in the chart, the backtesting results and the signals provided by the indicator have significant differences. The indicator may display a green or red signal to indicate buy or sell, respectively, but it is only valid for the next candlestick, which could be due to problem 2.

Key takeaway - Backtesting of trading indicators is necessary to verify their reliability and avoid future function problems.

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Ref:
"Machine Learning: Lorentzian Classification — Indicator by jdehorty." TradingView, 13 Mar. 2023
[url=Ref: "Machine Learning: Lorentzian Classification — Indicator by jdehorty." TradingView, 13 Mar. 2023 tradingview.com/script/WhBzgfDu-Machine-Learning-Lorentzian-Classification/]Ref: "Machine Learning: Lorentzian Classification — Indicator by jdehorty." TradingView, 13 Mar. 2023

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