Thoughts about bat pattern. Some tips and secrets. Part V.
Hey, traders. It’s Wednesday and we have another edition of “Thoughts about Bat pattern”. Today we’ll talk about backtesting and forward testing . I will also share some statistics with you.
If you have some experience in trading then you should know that 90% of success is not a strategy but psychology. What I mean by psychology? It’s simply your ability to execute trades the same way they are supposed to be executed. To do that you need to have a strong belief in your strategy. You should know for sure that in the end your strategy has a positive expectancy. You should know what your strategy’s max and average drawdowns are. You should also know what your strategy’s average profit is. You should know what your strategy’s average loss is. You should know what your strategy’s max consequence profit and loss are. And so on. You should know EVERYTHING about your strategy. In every given moment you should know if your strategy works ok. For example, you should be able to distinguish between an expected drawdown and a drawdown caused by execution errors. To have such a profound knowledge of your strategy requires years and years of using it. Luckily, there’s an exercise which gives us the same experience in a matter of few weeks. This exercise is called BACKTESTING. If you haven’t done this exercise then STOP TRADING IMMEDIATLEY.
Let’s suppose you have done the exercise. Now your task is to train yourself to execute the trades the same way you have been executing them in your backtesting. For example, you were placing trades at 0,886XA in your backtesting. There were tens of times price just touched the level and went in your direction. So, according to your backtesting, you had orders executed. But real trading is not that simple. I will reveal you a secret now (it’s a secret for those you don’t know it yet))): charts are drawn with BID price. Bid price is the price of executing sell orders. Buy orders are executed by ASK price. So think for a moment. Will your long orders be executed if price just touched 0,886? No. Eventually, your results will differ from the results of your backtesting because of this execution error. The same thing if you already have a sell order opened. To take profit you are to buy back whatever you have sold)). Will your take profit be executed if price just touched 0,382AD? No. Again, your results will differ from the results of your backtesting because of this execution error.
to be continued... check my next idea.
If you have some experience in trading then you should know that 90% of success is not a strategy but psychology. What I mean by psychology? It’s simply your ability to execute trades the same way they are supposed to be executed. To do that you need to have a strong belief in your strategy. You should know for sure that in the end your strategy has a positive expectancy. You should know what your strategy’s max and average drawdowns are. You should also know what your strategy’s average profit is. You should know what your strategy’s average loss is. You should know what your strategy’s max consequence profit and loss are. And so on. You should know EVERYTHING about your strategy. In every given moment you should know if your strategy works ok. For example, you should be able to distinguish between an expected drawdown and a drawdown caused by execution errors. To have such a profound knowledge of your strategy requires years and years of using it. Luckily, there’s an exercise which gives us the same experience in a matter of few weeks. This exercise is called BACKTESTING. If you haven’t done this exercise then STOP TRADING IMMEDIATLEY.
Let’s suppose you have done the exercise. Now your task is to train yourself to execute the trades the same way you have been executing them in your backtesting. For example, you were placing trades at 0,886XA in your backtesting. There were tens of times price just touched the level and went in your direction. So, according to your backtesting, you had orders executed. But real trading is not that simple. I will reveal you a secret now (it’s a secret for those you don’t know it yet))): charts are drawn with BID price. Bid price is the price of executing sell orders. Buy orders are executed by ASK price. So think for a moment. Will your long orders be executed if price just touched 0,886? No. Eventually, your results will differ from the results of your backtesting because of this execution error. The same thing if you already have a sell order opened. To take profit you are to buy back whatever you have sold)). Will your take profit be executed if price just touched 0,382AD? No. Again, your results will differ from the results of your backtesting because of this execution error.
to be continued... check my next idea.
