Backtesting Trading Ideas

Several readers have asked me to talk about how to backtest.

Firstly, I backtest an idea.

I see something happening over and over again in the market, and if I think it may be useful to watch and trade, I write down exactly what I want I saw. For example, order flow was positive as VB and smoothed CVD were green, both EMAs GREEN, and Price pulls back to 33EMA. This is the idea I that I want to test.

I then print out ten days of charts (I can't work from a screen - even my 24 inch ones) and look for that idea. I mark the charts every time I see it.

Once the chart is marked I write down the entry price in a column with a number corresponding to the mark on the chart and whether it is a LONG or a SHORT. I then go back to the chart and see whether my first logical scale point is reached or whether my drop dead stop would be hit. I take out the statisctics on those trades and look for a high win rate. How high? Over 60%. If I get that, then I'm in business. I then look at all the winning trades and all the losing trades to see what else I can do to filter out only losers. My aim is to get to at least 70% win rate.

I want to see at least 50 trades for this exercise so you may need more than 10 days of charts if the idea doesn't happen often enough and you're still interested.

Next, I concentrate on the winning trades. I look to see what each trade would have made using my exit rules.

I then gather the statistics adding back the losing trades. I now can decide whether I have something I can add to my trading setups.

The final step of this backtesting for me is to program it. Up until recently I used MultiCharts Easylanguage. Kiki helped me with this. However, with MarketDelta I have Volume Delta which is hugely important for me in seeing order flow. MultiCharts only gave me upticks and downticks. I look back on about a year of data and also forward walk it too.

This can all be done manually but using a computer for programming the backtests obviously makes it quicker.

P.S.
1. MarketDelta  has better than excellent customer service and they can help with backtesting for their system
2. If your question hasn't been answered or you don't see it posted, please email them again, I've managed to delete some comments accidentally.  This time I'll blame it on jet lag.

 Today's trades are for the Bund. You can see that there were only 50% winning trades but the day ended GREEN.

Click to enlarge