Backtesting. A required exercise
Shane D
How do you know you will succeed with your trade plan? How do you know if the system you are trading has a positive expectancy? What is the best way to learn your system inside and out? Manual backtesting. It is a very time consuming process but a process that can spell the difference between an increase in your equity or the loss of capital. This video is going to cover using the "hard right edge" of the screen to simulate real world trading. Bar by bar or candle by candle, you trade your plan. Think win rate is the prime indicator of your success? Wrong. I will briefly cover "expectancy" and R multiples but that entire topic is beyond the scope of this video. You will pick up the basics and that alone will give you the "long run" potential of your trade plan.
The suggestion is to do a minimum test of 30 trades to get an quick idea if you are on the right track. If the 30 is looking good, you can expand your test to include many more trades...100-200. This will help alleviate the "law of small numbers". This is where a trader will say "I used the stochastics for the last week and won every trade!" They then use it from that day on without proving out the long term potential.
In the end, you want to focus on the big picture. Many traders suffer from recency bias where they will focus on the few losers in recent memory. Conversely,some traders focus on the recent winners using filters missing out on the longer term past showing it either failed or made very little difference. Backtesting will give you confidence and a concrete shot at trusting your plan and trading it during the good and bad. That is the KEY.
Backtesting is not perfect. But what are the other options? Click for the backtesting video
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