Analyzing Results...

A friend asked, last week, how I go about analyzing backtest results.

After mulling the question over for a bit I think my brief answer would be that' it depends', but allow me to try and be a little more insightful...

If the system I am testing is 'fire and forget' in nature I am less interested in time of trade entry but very keen to know how many come in, what the draw-down on successful trades is, how long each will expose my capital for and what the underlying technicals (aside my trigger) were, on trade entry.

This all goes into a bespoke spreadsheet which I design to make post test analysis as easy as possible.

In that analysis I have 3 specific aims. I want to...

1. Spot and eliminate any outliers that stand apart from the norm in whatever respect.

2. Optimize stop placement.

3. Identify how I might best leverage the trading system to maximize profitability.

Basically, I want to cut out as many bad trade setups as possible and then optimize the risk / return equation for those that are left.

It may be, for example, that cutting out the high draw-down trades allows me to trade the fewer profitable ones at a higher lot size.

In all this, I keep in mind my own trading psychology, appetite for risk and need for affirmation.

I know from experience that any system returning below 70% probability, will have me doubting the integrity of what I have designed as the bad trades start to roll in.

Further, whilst I know this is sacrilege for some, this is why I have moved away from stacked trading; I am not good at managing such a high powered trading mechanism, objectively, in the vinegar strokes, and I simply cannot cope with the reality that one losing trade munches the profits of 4 winners...

... But I do salute those of you who can.

Testing and analysis of real-time, conventional, day-trading systems differs in that here I am acutely interested to know when each of these trades fire because I need to understand how many of them I'd have been able to take - and how this affects percentage profitability.

I'm also, for the psychological reasons stated above, prepared to tolerate far lower 'in-trade' drawdowns as I don't want to be tempting myself to take potential winners off the table just because I fire up my trade station at the wrong moment and get spooked by what I see.

To understand how such a system will feel like to trade the only option is to advance the testing software bar by bar and hone one's ability to spot set ups, enter at the correct trigger and manage the trade objectively once it is in-play.

In all of this I am guided by the philosophy of only attempting to pick up the very easiest pips and minimizing exposure of my capital to the market for the absolute minimum time necessary to achieve that aim.

In such a volatile market-place this is, perhaps, my most important guiding principle.