Why “backtesting” is holding you back

Beginner Questions
1

Over the years, I’ve seen countless discussions regarding the topic of “back-testing” and whether or not the practice serves its ultimate purpose. Recently, the subject has come up a bit more frequently on this forum so I wanted to share my opinion with others. Plainly put, I feel that “back-testing” is doing more harm than good, and those that tout its effectiveness are coming from a place of not understanding what it means to trade with a professional’s mindset.

First, we need to start w/ a few definitions (as I see them):

Live trading- a brokerage account w/ your own money on the line
Demo trading- a brokerage account w/ fake money on the line
Back-testing- pulling up a price chart, scrolling “back in time”, and applying a technical strategy to paper trade w/ no money on the line, moving forward x bars @ a time

This is my position:

There are practically zero emotions involved: Most traders know that the two most important human emotions to manage while trading are fear and greed. These two emotions are virtually non-existent when demo-trading / back-trading. Why? There is no money on the line. Humans have a deep connection to their money (some may or may not agree w/ this) because it is a representation (for most) of sacrificed time. Time in which they could have been doing something that they enjoy.

In other words, I sacrifice my leisure/hobby time to work in order to obtain money to fund those activities @ some point in the future; that’s the exchange. Thus, a connection is made to that money, and most people won’t simply treat it as if it had no value and blow it on meaningless goods/services.

When these two emotions are removed from the trading process, you’re not “trading”. It’s like trying to run a vehicle w/o a fuel source. Yes, you can put it in neutral and coast down a hill, but you’re not actually driving. There is almost no stress involved b/c your money isn’t on the line. Also, most folks will recommend back-testing on the weekends, which is doing even more harm. The stress of the work-week plays a major factor in your decision making process during live-trading, and you will not be in the same mind state on a Saturday morning as you were on a Wednesday afternoon. The weekend is for relaxing and resetting.

No frame of reference for exposure to differing risk factors: How can you replicate a live trading session, mid-week, where you maybe have some money tied up in a losing trade, and are considering a new position? There is simply no frame of reference to what a live trading environment would be inclusive of: account balance (margin available), recent account performance (are you coming off a string of losses and feeling risk-averse?), and market based event risk (was there a major fundamental shift and the market is hanging on the words of a central bank?).

Subconsciously, you’re going to be aware of event-risk that has already played out and had a major impact on the market. This will impact your ability to analyze and apply a strategy in the past. Markets move on anticipation of an event. Most successful traders will tell you “I don’t care what happened in the past, tell me what’s going to happen in the future”. From a trading perspective, this should make sense.

Subconscious awareness of where price currently is: If you’re back-testing a major pair (say USDJPY) and you haven’t been living under a rock for the last month, you’re 100% aware that the Yen has been gaining strength. Why would you make a bet against this during your back-testing session? Even if you admit it or not, you’re subconsciously going to have a prejudice to the downside.

Building improper technique: Self-generated confidence is crucial to becoming successful. However, self-generated confidence that is a product of an improper and illogical way to interact w/ the markets can do more harm than good. It’s simply not a 1-1 relationship (in terms of applying the “back-testing” strategy to a live market environment) for the above mentioned reasons (no emotional attachment, no frame of reference for risk, a subconscious bias).

Under stressful environments, the body will revert to a previous state of comfort known as muscle memory. The brain is a muscle. By back-testing, you’re improperly working out your brain and under live stressful conditions you will revert back to that moment of false confidence and sabotage yourself.

Back-testing has little-to-no value for technical traders: This is the conclusion. The fact that if you’re trying to interact w/ the market in a technical-only-manner, you simply cannot apply what you learned during back-testing to a live market environment. This does not mean that patterns, support/resistance, other relevant price action elements are irrelevant- that is not what I’m saying here. What I’m getting @ is- Yes, patterns, support/resistance, other price action elements are relevant, but they are meaningless without the existence of emotion, risk-tolerance, a connection to live funds, and the unknown aspect of future price movements.

All of the above-mentioned play a major role in the decision making process during live trading.

If you feel the need to “practice”:
Use a demo account, under live market conditions
Forex Tester 2- not perfect, but a major upgrade from back-testing
Review prior conducted tech analysis and live trades
Read up about other traders w/ success stories
Take a break! Resetting the mind for a few days (away from the charts) is necessary to avoid burning out

Looking forward to comments.
Jake

2

Hey Jake, I only got 2-3 sentences and was done, because I seen the phrase, " I Feel"

4

Hey Jake your spot on with this i agree 100 % , no money on the table will do away with the emotion and everything else that is part of trading.

5

I agree with your assessment that back testing is useless but for different reasons, you can back test a roulette systems as the roulette wheel is not effected by outside forces, it cares nothing about the financial health of the casino or how much money is sitting on RED. This is not true in the trading world, the markets are constantly being pulled and pushed by economic data, central banks and traders. What was moving a market during a back test is unlikely to be present in the future, making the data of little use in predicting future price movement

6

Great post, Jake.

MoneyNVRSleeps: khakis? What?!

7

You can backtest the results of spinning a roulette wheel, yes. But you can never replicate a “live” gambling scenario by simply looking @ what came up.

8

G’day Jake. On this one, I’ll have to respectfully disagree.

First, I’ll quote from someone more skilled than me and something I’ve quoted before

There is no substitute for statistically valid historical research when developing mechanical trading systems. In practice, this means learning how to program a computer to run simulations of trading systems performance.- Richard Dennis

Actually, it’s a very labor-intensive process. But there is no other way to evaluate and measure the potential of trade ideas.

To follow that up, if anyone wants to pop over to this thread 301 Moved Permanently you’ll see the labor involved in the above statement. However, my ego blow up and the others there were not prepared to put that hard work into practice to finalize the trading system. Pity.

The irony of it but is first you have to learn to trade and program before you can backtest. And for the records, only one bot has every passed my backtesting criteria and remains active on my charts. It can be found in that thread and is one I programmed myself. And there is no backtesting ticks.

9

Man, Im talking manual backtesting.

My backtesting has nothing to do with strategy tester, which i think he is referring to. Im talking about going back to a specific date, with the scroll back. And from that point, looking for your plan to play out by MANUALLY INSERTING simple lines and notes on the chart.

BUT, you could also do the same in the stratedgy tester. But the problem there is lack of good data and spread spikes and such. You can find the right data, but its a pain in the butt, for me anyways…

It is what it is, just another learning tool to perfect the craft of your plan, nothing more.

10

Tried to emphasize that I was coming from a place of back-testing purely TECH strategies.
:slight_smile:

I don’t disagree.

11

Im almost exclusively a Technical trader, and backtested thousands of hours. Maybe it helped me achieve my 90% win rate, *Shruggs, guess I wasted a bunch of time.

Darn it!!

Funny thing, they backtest in almost every sport also, its called Film session. To say backtesting is a waste of time and effort, and shouldnt be done is probably one of the off the wall things Ive ever heard of here.

I mean, I know it was a pie thrown in my direction when you made the thread originally, but comon man, your grasping in the air for garbage to try to make me look like the resident fool of BabyPips.

So, Mr Professional Forex trader, whats your stats like anyways? Do you even trade? Im very curious about it, seeing you know just about everything about the business.

I can bet ya 100% you wont even say, or come back with some crap like " I dont have to show you anything", Or " I never said Im a Professional trader" or " I make More then you, because your a loser trader" or " You’ll never be anything in this business" " you’ll be like the rest of the 98% losers" or " You constantly blow up account, I will out trade you anyday of the week"…

Which one will it be Dude?

12

It’s become more and more obvious (and unfortunate) that I have little to gain from interacting with you any further.

Personally speaking, I’m not really sure where some of your claims are coming from as I’ve never mentioned your account by name, whatever strategy it is that you trade, or quite frankly anything you’ve directly said in the past?

To that end, it’s also incredibly unfortunate that you’ve made some sort of attempt to “call me out” and now I feel obliged to answer. For the most part, you’re right when you say “I don’t have to show you anything”. Because, I don’t.

I don’t think that sort of devolving argument really holds merit any more, because it’s pretty easy to spot folks on the web who know what they’re talking about, and who doesn’t. However, if it will mean that you come @ me w/ more than “I beat you wear Khakis” (whatever that means), then I’ll show you how I’m making out.

  1. My strategy, thoughts, and live trades are all tracked here: PURE PRICE ACTION W/ JAKE ABRAHAMS. If you want to know exactly how I interact w/ the markets, read every post I’ve made here and you’ll be up to speed quickly. This thread was the result of an attempt to explore and share my price action strategy w/ a stand-alone FXCM account established in JAN 2016 for that sole purpose.

  2. YTD FXCM Analytics report snapshot of the Pure Price Action account below. For the record, and as mentioned many times above, I am hesitantly providing this. I was not ready to publicly release the stats for this strategy yet, but you have forced my hand, put me in the corner and I feel like I have no choice. Of course there is nothing to hide and I’m proud of what I’ve been able to accomplish, but at the end of the day I had a plan for this strategy that did not include releasing acct performance this early.

MTHLY STATS.jpg700×149 9.72 KB

LIFE STATS.jpg700×291 21.4 KB

So, let’s see your “90% win rate” and YTD performance and we can both go our separate ways happily.

Jake

13

Hey Jake, Thats pretty good, by Forex standards I would say.

I cant show you year to date, because it hasnt been a set strategy to date. As I said before, my Current system, is doing well for me at 4 trading days in. And its a accumulation of things that brought it together, and in different times. So I really cant give you much more then that, because Its been in testing/ rewire phase. trail and error, like the past 5 years, lol…

But, Im up 40%
45 trades, 5 loses
profit factor 3.1
4 trading days,

You didnt have to show, its a babypips joke,

and the Khakis thing,

It was from the state farm insurance commercial, Jake from State Farm? What color pants you wearing, Jake from state farm??, " Khakis" , lol…

Look dude, I wish you a large amount of progress in your business, There is no doubt about that. Im one to allways pat on the back for great effort, and in your case, good job.

Let me get a track record with this system, because Im never going to change it from here, so we should get a good guads of things in the following Month. Ill definitely keep you posted;;

14

Hello peeps!

In terms of backtesting,

THIS FUND MANAGER seems to like it :slight_smile:

15

Hi Jake,

I may have misunderstood, but from the way you talk about backtesting and the points you outlined, it seems to me that you are talking about manually backtesting (by hand) strategies?

16

Yep! Manual back-testing of a strategy relying solely on discretionary technical candlestick analysis.

17

[B]Forexunlimited you forget to mention the positive side with «backtesting tool »[/B]

[B]An active day trader will have very valuable to “backtest” his trading session as a debrief .[/B]

The session is still fresh in his mind and go back bar for bar to observe who he was reacting and what could be done different mental and technical in his trading…

[B]Backtesting can be a good tool to fine tone and work with you weakness…[/B]
Identify and work with scenario where you normal lose money …

Example weakness 1 for me was in strong trends days when my mind thinking reversal all the time .

Then is good to pick out trend days and working with that with a backtesting tool.

Weakness 2 for me was and is when prize goes thight side waves I jumping to much in and out of the market .

So then is helpful to find those days and work with the backtesting tool.

I think back testing is an valuable tool you save time is lot of scenarios you can work with, become better with entries /exit around minor r/s , Fine tone Sl blabla …

18

Hey Jake, Looking at your thread. First off, I didnt go and research your user name to get a dig on you, I might have treated you a taddddd differently off the bat. You came at me weird. And, honestly, I never seen you around here. Plus, I am defending myself, my actions and blahblahblah, because thats just me.

I believe in the possibilites of Major Wealth, and honestly, I also believe Im going to hit my goals, $54 Million, …

Sounds crazy and unrealistic, I know, I know, but if it has been done, Im going to figure it out to duplicate it.

Sounds funny, but I think we are more the same. Just taking totally different avenues to get there, and you evidently know about 99.99999999999% more then I do. And Id admit it, Im Really forex dumb. My focus has always been the candles, the action, and the money. Been here 5 years, and just learned, or actually paid attention to things like EURGBP, lol… I thought it was EURGPB, But I never paid attention to that stuff. ALthought some might say, WTH is he talking about, My focus has always been THE ACTION. How do I do this? How can I make this work? Like a freaking clocksmith, just watching the gears, forget when they came from, forget who makes them, Im focused on the Gears, the inner working of the price moving up and down.

I dont give a crap about anything else, Im focused on the action and reaction, to get that pip, that single .0001 of movement. What makes it tick.

Forums are baddddd man, bad bad bad,

I have respect for you, I hope you do well, like I said, before, we are after the same piece of Pie, you go in with a spoon, I go in like the Taz.

Hey man, We’ll see what happens right?!

I aint heard no bell.

19

@ Torulf39 - How do you account for the fact that there is literally zero emotion involved and absolutely no frame of reference for your tolerance to risk (i.e. account exposure)?

@ MoneyNVRSleeps - I’ll take that as a compliment and, no worries we’re all good.

See you around.

Jake

21

Hey Jake what about people using algorithmic trading or EA’s? Surely backtesting helps with that.

22

I don’t disagree Kinz and was solely focusing on manual [B]discretionary [/B]candlestick trading.

Jake