How do I backtest the right way
Below is a MRR and PLR article in category Finance -> subcategory Investing.
How to Backtest the Right Way
Summary:
Backtesting is crucial for new day traders. Markus, a day trading expert, shares insights on effective backtesting.
---
Backtesting is a powerful tool when used correctly, but many traders misuse it by relying too heavily on software features, mistakenly thinking that more testing guarantees better results. This isn’t always the case.
Consider the e-mini S&P: In 2000, the average daily range was 100-150 ticks. By 2004, it dropped to 40-60 ticks. A trend-following day trading system that worked before 2002 suddenly faltered. Why? Because the daily range decreased by over 50%.
One pivotal change was the introduction of the Pattern Day Trading Rule by NYSE and NASD in 2001. This rule required traders executing four or more day trades in five business days to maintain a $25,000 equity in their margin accounts. As a result, many traders moved from equities to the e-mini S&P futures.
This shift led to a surge in e-mini S&P volume due to stock traders using scalp methods. With higher leverage and lower commissions, these methods thrived, but they also killed intraday trends, causing trend-following strategies to fail.
Another significant market shift was the rise of automated online day trading strategies in TradeStation. By 2002, the use of these strategies increased by 268%, with overbought/oversold strategies gaining popularity. These strategies quickly countered any emerging market trends.
Conclusion
Successful backtesting requires understanding market conditions. More data isn’t always better; recognizing underlying trends is key.
In non-trending markets like the e-mini S&P, employ trend-fading systems. In trending environments such as commodities, use trend-following methods. Insightful backtesting helps you determine which strategy to use:
- If a trend-following method worked from 2000-2002 but not in 2003-2004, it’s not suitable now.
- If a trend-fading method was profitable from 2003-2005, consider trading it.
No single online day trading strategy excels in all market conditions. Most work well in one type (e.g., trending) and underperform in the other. Adjusting your strategies accordingly is crucial, and that’s where backtesting becomes invaluable.
You can find the original non-AI version of this article here: How do I backtest the right way .
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.