Recall I completed twelve months worth of testing for 32 instruments. The results (with graphs) were shared on this blog post. That earlier exercise I am referring to as the ‘forward testing’.
In the last few days I completed a backtest for the same 32 instruments for the same period of time. By backtesting I mean that I reviewed the charts and identified all the valid setups, stops and targets as opposed to rolling forward one hourly bar a time as I did in ForexTester2.
What were some of the key points in comparing the backtesting and forward testing?
- I was more selective with the setups, thus took fewer trades (470 down to 320)
- Generally speaking, being more selective meant waiting for more confirmation – sometimes the confirmation didn’t come, so there was no trade. Overall, it made a huge positive difference because it kept me out of a huge number of losing trades.
- Assuming a $100k trading account, and risking $1k per trade, my net return increased from $57k to $101k, whilst the total amount I risked across all trades decreased from $467k to $322k.
- Account drawdowns were lower. [A “drawdown” measures how far the cumulative profit/loss falls from a previous high point]
- All except one of the months were profitable (though three of these were BARELY profitable).
- Setups are easier to spot.
- Solidified rules as to handling major news announcements and daily cutoff times for entries.
- Average of just 1.27 trades per session. ZERO trades are entered for nearly half of the trading sessions.
- All up, HUGE improvement in backtesting over forward testing
Here are the graphs illustrating the result for the backtesting – note that the types of graphs are exactly the same as in the blog post for the forward testing (except for the chart showing a histogram for number of trades entered by session):
It’s great to have some excellent guidance from an experienced trader for making sure I am getting all the steps done in the testing process – so these next steps have flown directly from earlier conversations with that trader:
- I will now do a back and forward test for a reduced number of instruments to cover the 2013 and 2014 years. I am planning to get all that done this week.
- Following that I will compile a report on the strategy in its current form. Aiming to complete the following week. This report will provide the benchmark for the strategy, before looking to optimise the strategy.
- I also have some ideas for identify the market conditions favoring this strategy, and conversely, indicating the times the strategy is not likely to work too well.
- Meanwhile, live trading with £100 risk per trade will continue.