{"id":41727,"date":"2015-08-02T06:07:26","date_gmt":"2015-08-02T13:07:26","guid":{"rendered":"https:\/\/brookstradingcourse.com\/?p=41727"},"modified":"2019-01-24T09:21:43","modified_gmt":"2019-01-24T17:21:43","slug":"backtesting","status":"publish","type":"post","link":"https:\/\/www.brookstradingcourse.com\/pt-br\/ask-al\/backtesting\/","title":{"rendered":"Ask Al: Backtesting"},"content":{"rendered":"

BPA trading room Q&A: March 17, 2015<\/h2>\n

An article said backtesting is the first step to becoming a profitable trader. Do you agree with this and how do you advise a beginning trader to start?<\/p>\n

Audio duration: 6min 9sec
\n<\/em><\/p>\n

 <\/p>\n

Audio transcript<\/h2>\n

Backtesting is more complex than traders think<\/h3>\n

\"Wall<\/p>\n

Every now and then, somebody brings up backtesting, and I can talk for hours about backtesting, and I think that advice is horrible advice because, backtesting is far more complicated than what most traders who backtest understand. There\u2019s really a lot of math in backtesting, and there are all kinds of assumptions. Let me just say that most people who are backtesting and coming up with results, like in TradeStation, and they\u2019re coming up with all these profitable strategies, are fooling themselves. They\u2019re not intentionally fooling themselves, but they don\u2019t understand what they are doing. They think they understand what they are doing. They\u2019re creating stuff that just looks exactly like what TradeStation says, or any other, E-signal or anything else, MetaTrader; it doesn\u2019t matter which one. But you will lose money if you backtest ideas and trade those ideas. You will lose money because backtesting is much more mathematically rigorous than what it appears.<\/p>\n

Institutions backtest, yes, but…<\/h3>\n

If it was so simple that anybody in their first week of trading can come up with a trading idea and backtest it, and then use it to make money, do you think that you are smarter than a physicist or engineer at Goldman Sachs who has been writing algorithms for 20 years? Do you think in the first week or two you\u2019re going to come up with an idea that these guys, who have spent 20 years doing this, have not thought of? You obviously know that anything\u2014any idea that can be backtested has been backtested. Every hedge fund, every high frequency trading firms has a room filled with physicists, mathematicians, engineers, and they get paid $300,000, $500,000 a year to backtest. That\u2019s all they do all day long. And they have horribly boring jobs; they just sit at a desk and do backtesting all day long, but they don\u2019t care because as a mathematician, or an engineer, or a physicist, you have no other place in the world where you\u2019re gonna get paid $300,000 or $400,000 to do that stuff.   So, they know they have a crummy job, but they don\u2019t care. They\u2019re getting paid a lot of money to do a crummy job, and so they do it, and they get to live a lifestyle that they could not possibly otherwise live if they were not doing that crummy job.<\/p>\n

Back to backtesting, okay? If I\u2019m taking a bet\u2014if someone\u2019s asking me, \u201cAl, I\u2019ll give you even odds. Bet on that physicist with a PhD from MIT<\/a> coming up with an idea, or bet on this beginner trader who has been trading for six months, and started backtesting a few weeks ago.\u201d I\u2019m being facetious, and I don\u2019t want to be cruel, but I\u2019m trying to make the point that if there is a good workable idea, it\u2019s already been found by a thousand guys on Wall Street who have been doing this for a long, long time. People who run the hedge funds and the high-frequency trading firms, they\u2019re doing all this stuff. And I don\u2019t know if you have any idea how many algorithms a high-frequency trading firm has, but probably most of them have thousands of different things that they use when they trade. And, you know what they do at the end of a week, at the end of three days, at the end of two days? They stop using whatever they\u2019re using, because stuff that works only works for a few days. So if they\u2019re doing stuff that works in a trading range environment, they have programs that measure trading ranginess of the market and trendiness of the market, and they\u2019re constantly switching their algorithms to fit the market. And when a trader is thinking about backtesting, they\u2019re thinking about a Holy Grail; they\u2019re thinking about a goose that\u2019s going to lay golden eggs for them forever, and it ain\u2019t gonna happen. And if you come up with a perfect trade, a golden goose, and it\u2019s working consistently, it will probably take two days before 50 other guys on Wall Street discover it, and they\u2019ll start doing it, and then the reality is your golden goose will die.<\/p>\n

Far too many variables<\/h3>\n

\"al-brooks-10000-hours-backtesting\"<\/p>\n

I say that, and I\u2019m a guy who\u2019s done over 10,000 hours of backtesting. So it\u2019s not like, \u201cOh, Al\u2019s just saying it.\u201d No, I\u2019ve done 10,000 hours of backtesting, so I\u2019ve done all kinds of backtesting, and at the end of it all, after doing it for years, it\u2019s my opinion that, at least for my personality as an active trader, I cannot make money based upon backtested ideas. Theoretically, I could, but, I see too many exceptions. So if I backtest an idea, I see, \u201cOh, what if the prior two bars are big bear bars closing below their midpoints?\u201d Well, suppose one\u2019s closing above its midpoint. Suppose the range is 50 percent bigger than an average range? Suppose it\u2019s occurring in an environment where the moving averages have a slope of whatever\u201420 or something?<\/p>\n

There are so many variables. And then you have to factor in higher time frames. You don\u2019t have to do any of it, right? You can be just simple. If the open of the day closes above its midpoint, do I buy above the high of the bar? Do I do it for a swing? Do I do it for a scalp?<\/p>\n

If we have five consecutive bull bars, do I buy or sell? Five consecutive bull bars, you buy\u2014it went up,   Five consecutive bull bars, you buy\u2014it went down!<\/p>\n

I\u2019m sorry about going on with this, but I think that backtesting is a terrible idea. I think it makes much more sense to try to understand what the markets are doing. Are you going to understand the kinds of stuff that I\u2019m talking about: about what\u2019s going on – on bar 10, what\u2019s going on – on bar 37? You don\u2019t have to understand that to trade profitably, but if you learn how to draw channel lines and trend lines, I think you\u2019re in really good shape. If you learn how to recognize potential lower low major trend reversals, and either buy them or wait for a breakout and then buy, I think you\u2019re in good shape. But beyond that, I think backtesting\u2014it’s more recreation than it is on an occupation. I don\u2019t think you\u2019re going to make money doing it.<\/p>\n

Al Brooks<\/em><\/p>\n

Information on Al’s Online day trading room<\/a><\/p>\n

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BPA trading room Q&A: March 17, 2015 An article said backtesting is the first step to becoming a profitable trader. Do you agree with this and how do you advise a beginning trader to start? Audio duration: 6min 9sec   Audio transcript Backtesting is more complex than traders think Every now and then, somebody brings […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[159],"tags":[],"class_list":{"0":"post-41727","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-ask-al","7":"entry","8":"has-post-thumbnail","9":"override"},"featured_image_src":null,"author_info":{"display_name":"BTC Admin","author_link":"https:\/\/www.brookstradingcourse.com\/pt-br\/author\/richardhk\/"},"_links":{"self":[{"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/posts\/41727","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/comments?post=41727"}],"version-history":[{"count":0,"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/posts\/41727\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/media?parent=41727"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/categories?post=41727"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.brookstradingcourse.com\/pt-br\/wp-json\/wp\/v2\/tags?post=41727"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}