The Art of Properly Backtesting
For those of you who enjoy backtesting, or for those of you who are just learning how to backtest, I’m going to give you a simple test to run over the weekend. What I’d like you to do is to run the following test and send me the test results by Sunday night. This includes the number of trades, the % correct and the average. gain per trade.
Here is the test. You’ll test this on the SPY going back to January 1993.
The SPY is above the 200 day ma.
If the 2 period RSI closes under 25 two days in a row, buy 10% of a position on the close of that second day the RSI under 25.
If at any time you’re in the position, and it closes lower than your original buy price, buy 20% more.
If at any time you’re in the position and it closes lower than your previous buy position (the 20% position) buy 30% more.
If at any time you’re in the position and it closes lower than your previous buy position (the 30% position) buy 40%, more getting you to a full position.
The exit is on the close any time the 2-period RSI closes above 70.
When you send me your test results, also send me your trading platform you tested this on and the data source that the platform used.
There are two great reasons to do this test.
You’ll get a chance to practice testing TPS scale-ins.
As a whole, my strong guess is that there will be many different test results sent to me based upon the platform used and the data sources used. From there, I will be able to tell you whether the integrity of your code and data is correct and what you can do to improve upon it.
This is a good test and worth spending some free time doing. Send your results to me at l.connors@tradingmarkets.com and on Monday we’ll look at the key points in order to make your backtesting as strong as possible.
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Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.