Quote:
You have to think that quantitative trading is a game of probability and that market changes will change the probability so ideally you should never use the same strategy for a long period of time unless you are doing artificial intelligence.
The whole idea of that strategy is profitable for the past 2 year it should make money next year is a wrong concept, it all depends on future market conditions not past.
@pipscity
That is drammatically true from a scientific point of view, but all technical analist make the opposite assumption simply
based on experience and they all are AWARE of this.
Consider the following extract
"14. Although the future is unlikely to exactly mirror the past, assuming that future
market behavior will resemble the past is the best available assumption
on which to base our current decisions. Thus, we can select specific Technical
Market Indicator parameters that would have worked best in the past." (pag.4)
"Back-testing Technical Market Indicators has proved to be useful in actual practice
because the market’s behavior patterns do not change dramatically over time. As
Fed Chairman Alan Greenspan said, “Human psychology molds the value system that
drives a competitive market economy. And that process is inextricably linked to human
nature, which appears essentially immutable and, thus, anchors the future to the
past.” And as philosopher George Santayana wrote, in Life of Reason (1906), “Those
who cannot remember the past are condemned to repeat it.” (pag.7)
from "The Encyclopedia of Technical Market Indicators" by Robert W. Colby
Without this aware assumption all technical analysis should be a nonsense, because for example there isn't a physical law
(like gravitational law) between a cross up of emas (or a cross up of stochastics or a positive momentum ect.)
and an uptrend of price, in fact the gravitational law is true always but the cross up of emas has an up trend of price
only in a percentage of all cases, and the experience says this to us.
That said, let's consider
"How long should you back-test a trading strategy?
The more trades you use in your back-testing, the higher the probability
that your trading strategy will succeed in the future. Look at the following table:
Number of Trades 50 100 200 300 500
<>Margin of Error 14% 10% 7% 6% 4%
More trades mean a smaller margin of error, resulting in a higher predictability of future performance.
Somebody with a Ph.D. in statistics once told me that you need at least
40 trades in order to produce statistically relevant results. "
from "The complete guide to day trading" by Markus Heitkoetter
So let's choose for our backtesting at least 200 trades. Let's consider a common intraday strategy, it will require at lest
one year to produce 200 trades (only scalping strategy have higher frequency trading).
For these reason I suggested at least 200 or 400 trades for backtesting in previous post.
Now few words about "Forward Testing":
it is highly time consuming. If you need 200 trades with a common intraday strategy you need 1 year of testing, after
if the strategy didn't produce profit you have to change the parameters of strategy and start a new 1 year test and so on ...
At the end a question:
if you have to put a robot strategy on a live account what solution should you choose among the following:
--------------------------------------------------
1. BACKTESTED STRATEGY with:
- 24 months of backtesting
- trades: 400
- profit: 2000%
- CAR (Compound Annual Return): 1000%
- MDD (Maximal relative Drawdown): 20%
- CAR/MDD >2
- month with profit: 20
- month with loss: 4 (max loss per month < 15% of equity)
- monthly average profit: 83.3%
- winning trades %: 65%
--------------------------------------------------
2. FORWARDED STRATEGY with:
- 1 month of forward testing
- trades: 22
- profit: 300%
- MDD (Maximal relative Drawdown): 40%
- winning trades %: 65%
--------------------------------------------------
3. FORWARDED STRATEGY with:
a. 12 monts of forward testing
b. profit/Loss: -80% of initial capital
C. if(loss) change parameters and return point a. for a new test
d. after 10 tests (that means after 10 years) the strategy is in profit, destroyed by tests you decide to apply
finally the strategy to a live account without consider the other parameters results of strategy.
--------------------------------------------------
Best regards,
Frank
P.S.
Happy Easter