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How to Backtest a Trading StrategyBacktesting is a manual or systematic method of determining whether a trading strategy or trading setup has been profitable in the past. A trader should backtest a strategy to help determine if a trading strategy is likely a waste of time and money, or if it shows promise and profitability in a variety of markets. While you can get software that does systematic backtesting… we prefer manual backtesting as it can be carried out by any type of trader, It is a key component in developing an effective trading strategy. There are infinite possibilities for strategies, and any slight alteration will change the results. This is why backtesting is important, as it shows whether certain parameters will work better than others. What Do I Backtest?
The first thing to note is that you don’t need a full trading strategy in order to start backtesting. 

For example I personally am always looking at new trading setups and candlestick formation and then backtesting them to see how effective they are. 

You can test small parts of a trading strategy before putting them all together. 

And of course you can and SHOULD backtest your whole trading strategy in a number of different trading situations. 

How to Backtest

 1) You need data to use in testing… if you are testing short term strategies on small timeframes then use at least a few weeks of trading data.

If you are using higher timeframes then you should be using years of trading data.

 2. Define the strategy parameters. Entry conditions, exit conditions etc. Include as many “If X happens then I will do Y” scenarios as possible so that your strategy is repeatable. 

Its essential to include risk management in these parameters too. So decide on if you are risking a percentage of your account equally on each trade, what is that percentage. If you are managing your risk in another method, clearly define it as something you are able to measure. 

ALL OF THESE PARAMETERS ARE WHAT YOU ARE MEASURING AND TESTING. THESE ARE THE ELEMENTS THAT YOU CAN CHANGE TO SEE WHICH ARE MORE OR LESS PROFITABLE. 3. Use the TradingView rewind tool to go back in time and remove the predictive nature of knowing where the chart will be headed. 

You could go back in time and look for trades from a year, a month or a week in the past, depending on how far back you wish to look. 4. Analyse price charts for entry and exit signals. This can be done until all trades on the chart up to the current time have been located and marked or written down

(be aware that it can take some time and be prepared that you are unlikely to be able to do all of this backtesting in one session… it could take you a few sessions of backtesting and recording the trade outcomes to fully test a strategy.) 5. Once you have competed this process, then you can start to total all of the trade results up to see how profitable or unprofitable your trading strategy / setup has been over time. What Goes Wrong in Backtesting

Typically the pitfalls and the ways that people fail at backtesting are based around not being through enough. 

That could mean that people haven’t included enough data in the backtest. 

It could mean that they left too many unknowns in the strategy so when using it in a live trading situation the strategy isn’t usable or realistic.

Also it could be that people don’t back test for long enough to see if the strategy is profitable or not. If you only have a small sample size of trade then even a short losing or winning streak of trades would dramatically affect the results. You need enough trades to show winning streaks, losing streaks and all between so that you can be confident that your strategy will be able to withstand those situations in live trading. 

Imagine for example in your backtesting your strategy didn’t lose more than 2 trades in a row but when you start using it in live trading you get 5 losses in a row. This is a situation that hasn’t been tested so could show a different result. 

The goal is to backtest for long enough and through enough so that nothing in live trading hasn’t been tested previously. While it may not be possible to fully achieve this… it should be the goal and you should feel confident enough that you have done everything possible to ensure this is the case.
Education
by JoelWarby
57
Gold for Quadruple WitchingPrincipal rule: Isolated corrections "a" and "c" legs should always be played. An opposing complex which we have not got into too much details here about, on the other hand, is the "b", often where our opposition is goaded into action, before being trapped and played out with momentum! As we have seen is the case in Gold, a quick test of 1518 measured target contains a certain latent weakness, which shows up when we measure the extension from "a' and "b". We can call this dynamic weakness. When, on the forth corrective wave, the swing stands still (and can often look at rest) like with the past few weeks of chop, from which it will take a lot of compression and effort to force. I mean by this that since sellers have forced the breakdown, early buyers are forced into a decision and now left thinking it would have been easier if I had waited. the correction complex is an instrument of attack! It is hard to explain the why behind markets (as with most things in life) moving in waves (for those looking to dig deeper on timing cycles and etc recommend checking the work of Martin Armstrong), however experience has shown that from mapping correctly with impulses and corrections it makes it easier to hold out. Notice the positions we were loading together in 2019 and the strategic requirement for riding the impulsive leg. You should ride impulses where possible without any need for help, corrections are more of a challenge and require further monitoring as there is still the chance of our opponent occupying the whitespace. For now continue aiming for 1518 before the fifth and final impulsive leg (multi-year rally) begins in 2022. If there is enough interest we can open up the Daily and four hourly chart tomorrow and start to zoom in to look for more positions with the expiries. Thanks again!
FOREXCOM:XAUUSDShort
by ridethepig
14
Trading Idea - #Steinhoff - The Gambling! HIGH RISK TRADE! BUY! Entry:0.2288 EUR Target: 2.7976 EUR (+1100% profit) Stop: 0.0794 EUR Steinhoff International Holdings N.V. specializes in the retail trade.Sales are distributed among the various business segments as follows: - Retail (97.9%); - Financial services (1.8%); - Other (0.3%). The geographic distribution of sales is as follows: South Africa (37.3%), Africa (7%), United Kingdom (19%), Poland (11.1%), Europe (16.5%) and Australasia (9.1%). Number of employees : 91 519 people. - South African retail group Steinhoff reported on Friday a 15% increase in sales for the nine-months ended June 30, as COVID-19 lockdown restrictions reduced throughout the period across its markets. - Steinhoff has been restructuring its operations since revealing accounting fraud in 2017, selling off assets and paying off debt. - A big hurdle to overcome is settlement of lawsuit claims from shareholders and investors, which it hopes will be approved in September at a creditors meeting.
SLong
by Traderherz-Analytics
$PAGS: to make you BAGS?Today we are witnessing a sharp turn around in Emerging Markets $EEM after the Jackson Hole meeting. $IWM a strong indicator of risk tolerance has seen a sharp move back up into it's middle pivot. Could the continued low rate environment and strong economy be enough to continue the rush into risk-on assets? Keep a close eye on $EWZ though (Brazil ETF in which PAGS is located) to pin point entries. On the technical side of things, keep an eye on entries in between the two trend lines in which the current candle stick is located between and stops outside of the bottom two trendlines. I'd look to scale in over the next couple of weeks and see how strong the dips in $IWM, $HYG and $EEM are to see how much continuation is possible to the upside. Good luck traders!
NYSE:PAGSLong
by Fox_Technicals
The Hard Truth About Trading 😅 Well, that is just a joke. Or not a joke? In every good joke, there's a sliver of truth... So many people blew their trading accounts in a blink of an idea chasing the profits, so many people went bankrupt practicing leverage trading... Do not be that guy in a picture. Be a true trader! Never forget about risk management and don't be greedy. Never let your emotions control you. Stay calm and humble while you trade. Have a great weekend! ❤️Please, support these drawings with like! It really helps!
Education
by UnitedSignals
3
The Hard Truth About Trading 😅 Well, that is just a joke. Or not a joke? In every good joke, there's a sliver of truth... So many people blew their trading accounts in a blink of an idea chasing the profits, so many people went bankrupt practicing leverage trading... Do not be that guy in a picture. Be a true trader! Never forget about risk management and don't be greedy. Never let your emotions control you. Stay calm and humble while you trade. Have a great weekend! ❤️Please, support these drawings with like! It really helps!
Education
by UnitedSignals
10
MrRenev portfolio exposedHere is my current short term portfolio. This might give the reader an idea of how a moderately diversified short term portfolio might look. I use various tools (including turbos, options...) so it's hard to say how much I have in, but I know how much of original risk I got. Which is today €500. I added my little XRP bag from earlier this year to my crypto holdings to get to exactly 500. It makes more sense to build a PF looking at risk rather than the size that doesn't mean anything by itself. Of course I have some winners and I have trailed my stop so this is why I precise "original" risk, that's the risk when I opened the position. The whole thing is maybe €40,000 with €25,000-€30,000 in Forex which would make it around 70% but it is less volatile, in "risk" terms it's actually 30%. Entry stops are tight (for example 0.50% with FX, 2% with S&P, 1% with commodities depends). I am sure I have 25 to 30K in FX, it's the rest that is hard to evaluate. Here is the detail: 30% - Forex: 2 longs on the Yen, 2 shorts on AUD, and short USDZAR. 25% - Commodities: Gold, Platinum, Natural Gas. All long. 23% - Indices: All in the S&P500 long, pyramided in since April. 12% - Crypto: Mostly Bitcoin. And a bit of XRP (it's less than 6 month old). 10% - Stocks: Pfizer & Moderna. I also have a few stocks & cryptos that I hold long term and have not listed here. And cash in the bank. And physical goods in my house. I even have stamps and a few old coins. I don't check on it every day, or week, or month, or year, but I really don't care about the long term stuff, I am focussed on the long term. Looks like I have found a perfect trick to not worry. I am not "ultra" diversified, but some billionaires have hinted that diversification may be for idiots. If you saw Ray Dalio present his "holy grail" you know that (roughly) you get a huge improvement in risk adjusted returns going from 1 to 5 (good) positions, a little more improvement going from 5 to 10, and it basically flatlines past 10 positions no matter how much you add. This is universally true, I'm sure it can be proven by a mathematician and the limit of growth will be Euler's number 2.718 (like maybe the stdev can only be improved 2.718X?), no matter how many uncorrelated positions are added. The reasons for having dozens of positions is either you're such a whale you have to, or you're trying to attract clients and plenty of positions makes you look pro and justifies the cost and also makes it look too complicated to do for a novice. My positions shown here are all short term, with: FX and Commodities and Stocks (65%) all under 2 months S&P500 and Crypto (35%) all under 6 months I have been long US indices since September or October of 2020 but it was tech100 and I closed it all since then. 33% of my holdings are correlated to the US stock market but I am in the green on the S&P and have guaranteed stops, I have pyramided into my winner over time, so there is actually no major risks there. I am not a professional risk manager and I don't give advice but I don't think I have crazy risks. No single instrument (a currency, an indice) ever has a leverage over 5 (when adding all pairs or all correlated indices). The max leverage I have been using on a position ever as far as I can recall is 2 (0.25% stop loss with a leverage of 2 = risk of 0.50% on the single position). Anyone who understands elementary school level maths should be able to understand the problem with too much volatility: A 3% drawdown takes a 3.09% profit to get back to breakeven. This is 3% more (3.09% is 3% more than 3%). A 10% drawdown takes an 11.11% profit to get back to breakeven. This is 11.11% more. A 30% drawdown takes a 42.9% profit to get back to breakeven. This is 42.9% more. A 70% drawdown takes a 233.33% profit to get back to breakeven. Good luck. Simply since this is short term there will be much more volatility, so careful with leverage! (Indeed, if a long term portfolio had say 15% deviation happen every 100 years, the short term one could have this every 100 months or even 100 weeks). And then there are the black swan events... They don't happen but when they do it stings. And in one's career they WILL happen. Bill Hwang got destroyed by having 5 leverage on all his money, concentrated in a few stocks. The "Swiss Franc Tsunami" was a 15% drop. You'd have to be a complete mongrel to get wiped out, that would require over 6 leverage on a single currency. Legend james Cordier had next to 100 leverage divided between only half a dozen commodities, he was riding at least a 10X on NatGas alone. Even if you had 10 leverage on stocks but distributed in 10 a 20% gap down wouldn't wipe you out it's very unlikely they ALL gap down. Don't go 10X in stocks even if diversified, that was just for the example, in the EU it's not even possible anyway max is 5. I even posted ideas for some of those positions With Bitcoin I think I post everything. Not sure. Almost 1 year ago, "buy area visited", hah I actually bought the very bottom. As I said this is nearly 1 year old but I moved to the S&P500 back in April to catch a new swing. 2 different trades within a long term bull bias. Buying pullbacks with tight stops you get stopped often but you also buy the very bottom often. I probably mentioned my transition to the S&P500 somewhere but without details and I don't write every single time I add or take profit or reduce my position. Might add a bit to crypto if it keeps going. Hopefully I get to short GME soon, should reduce my overall stock risk, maybe. It can always shoot up while the rest crashes down, I don't think this is likely it's a 1/100 thing, it does happen, and you want to make sure you'll survive it, but it doesn't happen that often so it's worth taking the risk. Typicall I might have something like this: 10 positions 2 wins I'm trailing (> 5R) 3 little wins trying (2.5-4.5R) 5 positions around my entry (between -1R and 2.5R) I rarely see red in my accounts, losers go quite fast. So mostly I look at positions in the green. It has the benefit of feeling good. Losers hold losers, that simple. Individual positions are very volatile, I might see a currency pair have a drastic move against me and crush my soul, but then I log in my accounts and I see my overall profits have not moved much, while the 1 pair was crashing 3 other ones sligthly went up. So it makes it more of a slow and steady growth rather than some hysterical bipolar game.
Education
by MrRenev
3
What happens at each stage of the market cycle?This picture is of vital importance. It's something that you simply have to try to recognise when trading, whether you're multi asset, trading only crypto, FX, equities - it simply doesn't matter, since sentiment is indiscriminate and uncaring as to your asset class. In each section, we've got what is occurring at each stage. 1) Risk off. 2) The start of the crisis management 3) Risk on 4) Caution On the right hand side of each diagram shows what generally is bought during these periods, and how your portfolio *could* be constructed. And at the bottom, is what is generally sold off. What we always have to remember is this... 'How do we optimally construct our trade ideas/portfolio to make best use of the current market condition?' A trade that you think should come off under one market condition (especially if you're technicals focused) might not work, since the market context doesn't support the trade's success. Key to this is understand the beta of different asset classes to. Let's take FX. AUD, GBP, CAD and emerging market currencies are all high beta. Here's the equation to work out beta of say, EURUSD... Beta (EURUSD) = StdDev (EURUSD) / StdDev (market average) This implies that they move pretty heavily in line with risk sentiment and probably have outsized returns relative to the average. Countering this, EUR and JPY tend to be pretty low beta, predominantly due to their respective central bank policies. Being long AUD on a return to caution (as I believe we are in now, for example, on a technicals basis would probably be the incorrect thing to do. Priming yourself not necessarily to forecast, but to get to grips with where we are now and whether anything can change based on certain factors is absolutely vital. Thanks for reading, and let me know in the comments if you would like a full image of this!
BITSTAMP:BTCUSDEducation
by FinkPro
3
Visualizing Risk ManagementI would like to save people from getting burned so after 3.5 years of being in this space here is my advice: 1. It is easy to fall in love with an investment, especially when you believe it could make you rich. Have belief, but don't be blinded by it. Consider that you could be wrong, late, or even too early. 2. Price can remain irrational longer than you can stay solvent. Getting chopped up in the range will dwindle your capital that can be very hard to recover. 3. If everyone knows it, the market will no longer follow that path. The moment you determine a certainty is the moment you're destined to learn some lesson. 4. Doing nothing is hard. It feels good to be all-in, but this pushes emotions to the brink for new investors that can't stop looking at the screens. Trading/investing can be as simple as drawing one horizontal line on a chart. Price goes above and you're in. Below and you're out. Numbers don't lie. Develop a plan and cut the emotion.
Education
by Bohrbtc