Hi all,
I am a newbie for sure. I have been reading about all these systems and see the encouragement of BACK TESTING for all of them.
My question is what exactly does that mean? Does it mean that if according the cowabunga system, if a cross occurs, does it actually go the way the signal says or not?
Also, how do you calculate drawdown and reward:risk ratio from looking at historical charts testing a system?
If the backtest suggests that x will occur n% of the time when y occurs, then there is reason to believe that it will continue to be profitable within a confidence interval of (n%-i) - (n%+i). Though, always be wary of type I errors. Data-mining or even simple over-optimization will lead you to ruin.
Drawdown is calculated in two different ways:
In-trade drawdown is also “maximum adverse excursion.” It is the distance from your entry that the trade moves against you before the trade moves for you (and ultimately you exit). If you draw a horizontal line through your entry, it’ll be the peak amplitude on the losing side of your trade (e.g. the lower half if you’re bullish; the upper half if you’re bearish).
The other type of drawdown is closed drawdown. This is pretty much a series of losing trades until you are able to overcome the previous highest balance. Your drawdown would be the peak-to-trough range from the series of losses to the previous highest point in your balance.
Risk-Reward is calculated by (risked amount)/(reward ahough ((reward amount)/(risked amount)). It’s best to keep things relative by assuming a risk of 1 and determining your reward amount as a proportion of that.mount). It’s usually flipped to make it easier to understand t
So according to the 1% rule, what would an actual trade mean for me if my account is $1000.