Get started

Testing

Proving Your Trading System with BacktestingWouldn’t it be great to see the future? To see where turning points in price will occur with a high degree of accuracy? To see if a trading system that you developed or bought or learned actually works? Well, you can, with a method called BACKTESTING.  Backtesting performs three important functions: 1: It helps you IDENTIFY the reliability / win rate of your trading system over time. 2: It helps develop and reinforce the muscle memory you need to EXECUTE opportunities in your trading strategy 3: It helps you continually REFINE / improve your strategy as you observe it work against price action, ultimately increasing your "hit rate" as a professional trader. The first requirement of a trading system is that it works via RULES. There are no 'hunches' in the market... the market has *specific* behavior patterns and our job as traders is to recognize those patterns and *capitalize* on them. Backtesting has three important requirements: The first requirement is that your trading platform supports backtesting. Can you go back "x" amount of time and look at the timeframe(s) you need to make the decisions you would have made if you were "in the moment" in an efficient manner in order for you to simulate hundreds of trade setups? The second requirement is that *you* are willing to put the energy and work into testing your trading system within an inch of its life before you risk a single penny of your trading capital. You need to know WHEN the system works, WHERE the system fails, and WHY the system worked and failed when it did, and that takes hundreds (if not thousands!) of simulated trades to do so. As you are observing the system in action you will begin to "see" the patterns in a new light. It will become more and more intuitive and you will find opportunities to 'tweak' the system as you go along. You will identify patterns when trades fail and stop trading that pattern. You will see opportunities that got away and you can 'tweak' your system to take advantage of those opportunities. Most importantly, you will see whether the system even works reliably at all and ditch it if it doesn't. It may be frustrating to decide to do so, but the good news is you will not have lost a single penny trading a faulty system to begin with! TRACKING YOUR TRADING SYSTEM To track the accuracy of your trading system you will need to setup a spreadsheet that will record the important variables you want to track. For example, you may want to include the headers, Asset / Date / Time In / Time Out / Long or Short / Reward to Risk Ratio / Gain or Loss / Account Balance The "Reward to Risk Ratio" column is the most important. If you read my previous column, "Trade Like a Pirate" ... ... I discuss that you need to think in terms of Percent Risk per trade ("R") and not Dollars. This will show you how well your strategy works. For Example, if after tracking 100 trades you find out that your system has a 33% success rate, your account will grow by 1% for every three trades if you follow a minimum 3:1 Reward to Risk Ratio (3 -1 -1 = +1). If you find on average 6 trades per day, your account can potentially grow by 2% per day. Under the "Account Balance" column, if you add the trade's win/loss to your previous account balance you can determine how long it would take to get 'x' amount of money from where you started (or how long it will take and inferior system to lose it all as well!) Testing your trading system also shows you how many opportunities present themselves per day / per hour and when the best time is to go 'fishing' for trades. Backtesting might tell you that you need to wake up 2 hours earlier (and go to bed 2 hours earlier) if you want to achieve the goal of replacing your car in 6 months. Or fire your boss in 24 months. Or pay off the mortgage in 3 years. Having a plan to *make* money should also include your plans on how and when you want to *spend* that money - how you will 'pay yourself'. Socrates famously said “The unexamined life is not worth living.” Likewise the unexamined trading system is not worth putting your hard earned money into. The more you backtest your system, the more you will gain (or lose) confidence in the system which will ultimately determine the actions you will take. Another happy by-product is that not only will you be able to refine your trading system, but you yourself will be continually refined in the fire of the market, exercising your mental muscles looking for opportunities that meet your particular trading system. For instance, by analyzing all my losing trades in my first batch of 100, I was able to identity a pattern in the formations common to all failing trades but not winning trades. I then modified my trading system to exclude trades which showed that pattern, increasing my success rate by 30% in the next 100 trades I tested with the new system. Not happy with that, I went through my losing trades from Round 2 and found another common pattern among them. Eliminating those, I modified my system and increased my success rate by yet another 20%. Finding what works is often a product of finding out what doesn't work, and just stop doing that! If you need advice on how to stop a bad habit, just listen to Bob Newhart: www.youtube.com Finally, just as any athlete will you tell you that you should "Warm Up" before performing any strenuous exercise, one thing my backtesting system has taught me is that I need to spend the first 30 minutes of my trading day "warming up" by finding all the opportunities that presented themselves in the Futures market during the overnight session and log them in my spreadsheet. Likewise at the end of the day I look at all opportunities I might have missed so I can reduce the likelihood of missing them again. The original title of this article was "Backtesting to the Future" which reflected this habit: by 'warming up' before actually trading I got my mind prepared to "see the opportunities" for the future day ahead, and I identified these patterns a lot better than I would have if I entered the pool cold and experienced the 'cramp' of a losing trade. Admittedly, backtesting a highly visual concept, so I will be following up this article with a video showing an example of my backtesting strategy and how you can model my system to meet the needs of *your* system. As I love to say, "Good artists copy, great artists steal." Likewise, "Good traders copy... Great traders steal." I hope you can steal some of these ideas and have them help improve your trading game! Share your thoughts and success below! As always, I'd love to hear if this has helped you become more confident and profitable in your trading. Like and Follow if you haven't already and you will be alerted to when I post the followup video! Trade hard and trade well!
Editors' picks
Education
by ocaptain
105
XSPA ready (Golden Cross)XSPA began it's pilot covid-19 testing program this week in contract and in conjunction with JFK airport. More airports to follow and getting lots of media attention. XSPA was featured in a time magazine article today. I am long with an avg of $4.71. My price targets for the year are marked. I believe these will be hit by end of year. I will take profit at each target and at any time I may sell my entire position and look for an opportunity to reposition. Trade carefully. Yea I know I am crazy. GLTA. Not Financial Advice Not a recommendation to buy this stock
XLong
by UnknownUnicorn6673904
STORM/USD - Testing New Resistance- Watch for break.Storm has seen a string of Daily Green candles and it is now testing an important break level. I've been trading on the daily candles but here's some 4hrs to try and better explain where we might be heading. This one is on my watch list due to the inbound re-branding and launch of STORMX. This launch is promised to coincide with ability to Stake tokens. When STORMX launches you will need to swap these tokens 1/1 but the platform will allow about 4 months for this process so there will be no rush. (Website and exchanges should have information on how this will transpire but sounds like a simple process) There is a resistance line just above this break line so cautious entry advised. Ideally we will see them both broken within a single daily candle. Keep an eye on it and be very particular about entry. if getting involved- 20% swings daily is not uncommon here and a rejection from this level is plausible. As always, not financial advice, just my own TA and thoughts. Bingaz
SLong
by Bingaz
XSPA 1D - Awaiting breakoutThis represents ~20% of my RISK ADVERSE portfolio. Cost basis @ 0.40 but have been buying since the 0.30s. This company is currently trying to add to it's current portfolio of Spa Centers located in airport terminals (post TSA checkpoints) to become testing centers for COVID. Current news is that there are pilot programs going on, but the only location that seems to have actually started this program is the JFK airport. I know they are in a lot of the major airports across the country and world so there is a big opportunity for them if they play their cards right. Once the news hits that they are testing thousands of airport employees daily (pilots, maintenance crews, TSA employees, and potentially antibody testing). This speculative play has a big upside and low downside as this was a 2 dollar stock prior to COVID, just operating as a spa in airports that will eventually get foot traffic back. ALSO they have been diluting to raise capital so this has been keeping the stock price down with all the selling in the market. This should end soon and remove the selling pressure. Do your own due diligence, IMO buying around 0.50 or below, if it closes below 0.48 they are in trouble. But I believe with the hype and dilution slowing down we see it hold 0.48. PRICE TARGET: $1.00+ All it would take is 1 Press Release saying they will be testing all the pilots and TSA members as a matter of national security or Trump mentioning testing at airports during a conference to BLAST OFF. GOOD LUCK DISCLAIMER: I AM NOT YOUR MONEY MANAGER, THESE ARE MY OPINIONS AND NOT SOLICITED FINANCIAL ADVICE. TRADE AT YOUR OWN RISK AND KNOW WHAT YOU OWN.
XLong
by UnknownUnicorn7786231
4
Biontech AG Outbreak - First COVID-19 human vaccine trial test Hey fellow Trader, The uprising Biotechnology company from NASDAQ:BNTX Mainz, Germany is on its final steps from developing a vaccine for the actual Bio-weapon health crisis from the "new flu" . With Rolf Zinkernagel a brilliant Scientiests that can proudly say to win a nobelprice and a strong financial background , from big names in the Pharmaceutical field. When BioNTech AG announced to start with the first human vaccine tests after getting an approval in Europa , a US approval should follow shortly after also. We should expect News from those test in end May/june and if they´ve managed to create a proven vaccine afterwards im staying LONG in this Outbreak because its Trending and the Chances are high for a good R/R. A Golden Cross is forming and the Overall Stock is positive and with a low beta so less correlation risk in this given "Crazy Market" . So with a break of the 56 level we should see a strong move up. Goals are high and i think it could touch the 100 mark again with reactive move down to given support levels if they arent successful with their vaccine Therapy. STOPLOSS tight at 49,45 I hope this was helpful but it only displays my opionion and no financial adivce is given here. Sincerly, Sebastian
NASDAQ:BNTXLong
by Sebastian-TradingExpertsEU
1
GBP/AUDHello guys ! I'm posting this idea for the London session on tomorrow morning. On this chart we have two oportunities, a long one and a short one. First one, the short oportunity is from 1.95579, sell to first support at the 1.95053, at this price is also one key price of the fibbonaci when our pair was changed bias from long to short. After that, we have an other strong support, tested twice on 13 and 14 February. At 1.94328 he can also have a short oportunity, the target can be at the 1.93723. After testing those two support line, we can go on long, overall we can profit for 4 time on this pair, 2 longs and 2 shorts. We also have an uptrend on 1 H, 4h and Daily. But please keep in mind that for our long setup we must to have a reaction from the price. So one more time, we can go short from 1.95579 with TP at 1.95053 and SL at 1.95680 An other short from 1.94328 with price traget at 1.93723 and a SL at 1.94550 And our longs are from the 1.93723 to 1.94115 with a Sl at 1.93550 and the second long from 1.94428 to 1.94950. Please press the like button also a comment will help me as a motivation. Thanks and keep in profits ! Also in short term from now i want to start an investment group, free, a long term investment, just send me a messenge so i can invite you, thanks a lot !
by Andrei_C