Testing your System - Manually

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Introduction

We need a way to test our trading systems on the market without financial risk. Is this the same as trading live, no, because there isn’t a liquidity provider on the other end of your trade performing ACTUAL execution; but it can allow us to test our strategies in a dynamic environment.

The downside to manually back testing a strategy is that it will take a long time to get enough results to test whether your system works. If we want to test a strategy on a daily chart, it may take an entire historical year just to place a few trades. A few trades isn't enough to move to the second stage of system testing - a live demo account.  We need enough historical trades to measure back testing.

It’s important to note any back-tests that we perform, manual or automated, suffer from one draw-back that past performance is not necessarily what's going to happen in the future. But that’s not the only point of manual back-testing. The other reason is to train ourselves, using the tools of the strategy being tested, so that we know how to most effectively employ the approach. We can back test on any timeframe, with any market, and almost any strategy. Many broker platforms and trading packages have this capability in place. All you need to do now, is choose one. 

Simple Back Test: Step-by-Step
  1. Chart your Market - We need to chart our market with the indicators we’re going to use and in the time-frame we plan to use with our chosen system to test. 
  2. Scroll Back a Year, or as far back as you can 
  3. Scroll Forward Bar by Bar - Click forward bar by bar until you find a trade that meets your chosen system's entry criteria. Record how long it took to get to this point (this will help determine how many trades you’ll get over your time frame) 
  4. Place your historical trade based on your system, i.e. entry point, risk size, position size, reward to risk ratio, etc… Record everything in a journal. 
  5. Record Profit or Loss 
  6. Repeat steps 3 to 4 over the same market. 
  7. Repeat steps 1 to 6 over a variety of other markets if you plan to trade over several markets
You need to complete the back testing to accumulate enough data to satisfy your need that the strategy is a winner or loser in your chosen market(s). This will probably require 100 trades or more, over a variety of markets. If you only test one market, then only trade that one market until you’ve tested others (However, until you get more experience, it may be an idea to trade only one very liquid market). Once you’re satisfied, go to a live demo account. Here you’ll have live dynamic pricing, where other trading pit falls like slippage can occur. Only then go to live trading!   See Mod 4. Toolbox. Software, Scanning and Testing for more on the 10 commandments of back testing.

To Sum Up

You may have thought while reading the above lesson, "manual testing a new system takes time".  It does, so for quicker back testing it's a good idea to use dedicate software that will back test in an instant once you set your parameters. Some packages live Ninja trader and Meta trader will allow this.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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Introduction

We need a way to test our trading systems on the market without financial risk. Is this the same as trading live, no, because there isn’t a liquidity provider on the other end of your trade performing ACTUAL execution; but it can allow us to test our strategies in a dynamic environment.

The downside to manually back testing a strategy is that it will take a long time to get enough results to test whether your system works. If we want to test a strategy on a daily chart, it may take an entire historical year just to place a few trades. A few trades isn't enough to move to the second stage of system testing - a live demo account.  We need enough historical trades to measure back testing.

It’s important to note any back-tests that we perform, manual or automated, suffer from one draw-back that past performance is not necessarily what's going to happen in the future. But that’s not the only point of manual back-testing. The other reason is to train ourselves, using the tools of the strategy being tested, so that we know how to most effectively employ the approach. We can back test on any timeframe, with any market, and almost any strategy. Many broker platforms and trading packages have this capability in place. All you need to do now, is choose one. 

Simple Back Test: Step-by-Step
  1. Chart your Market - We need to chart our market with the indicators we’re going to use and in the time-frame we plan to use with our chosen system to test. 
  2. Scroll Back a Year, or as far back as you can 
  3. Scroll Forward Bar by Bar - Click forward bar by bar until you find a trade that meets your chosen system's entry criteria. Record how long it took to get to this point (this will help determine how many trades you’ll get over your time frame) 
  4. Place your historical trade based on your system, i.e. entry point, risk size, position size, reward to risk ratio, etc… Record everything in a journal. 
  5. Record Profit or Loss 
  6. Repeat steps 3 to 4 over the same market. 
  7. Repeat steps 1 to 6 over a variety of other markets if you plan to trade over several markets
You need to complete the back testing to accumulate enough data to satisfy your need that the strategy is a winner or loser in your chosen market(s). This will probably require 100 trades or more, over a variety of markets. If you only test one market, then only trade that one market until you’ve tested others (However, until you get more experience, it may be an idea to trade only one very liquid market). Once you’re satisfied, go to a live demo account. Here you’ll have live dynamic pricing, where other trading pit falls like slippage can occur. Only then go to live trading!   See Mod 4. Toolbox. Software, Scanning and Testing for more on the 10 commandments of back testing.

To Sum Up

You may have thought while reading the above lesson, "manual testing a new system takes time".  It does, so for quicker back testing it's a good idea to use dedicate software that will back test in an instant once you set your parameters. Some packages live Ninja trader and Meta trader will allow this.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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