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How can a strategy be profitable when backtested but not when actually used?
Broker: AMP/NinjaTrader/CQG/Kinetick/Tickdata, Inc.
Trading: ES. ZB
Posts: 7 since Jul 2010
Thanks Given: 4
Thanks Received: 8
No mechanical system--totally objective, will be profitable in the future.
They may "work" for a while and you'll think you are going to be rich.
(They would be profitable for longer in the past--1980s and 90s.)
Think that's not true? Then name one.
By the way, why are so many systems offered for sale versus actually trading them and getting rich?
Excalibur Testing Software by Futures Truth was one of the first full-featured backtesting platforms. The software development process started in 1985 on a CROMEMCO 3 computer utilizing FORTRAN IV. The computer had a whopping 64k of RAM and used 5-1/4-inch floppy drives. Trader John Hill spent nearly $20,000 for the computer and hard drive — an enormous sum for a machine with the fraction of the computing power available today for a few hundred bucks.
Wayne Andrews, a close friend of Hill’s and a computer scientist, was instrumental in helping Hill acquire the CROMEMCO, as well as providing his own personal tick level price data for Hill to use.
I'd agree completely with your first sentence, if you add the word "forever" to the end of it. Mechanical systems can work for a good amount of time before they don't.
Your point is a very good one - traders should assume that at some point their strategy will stop working, and build risk management / position sizing etc. with that in mind. That way, they will avoid being wiped out by a strategy that stops working.
Some of the worst blowouts I have heard about were from traders who stubbornly held on to a method, when the market was telling them the method no longer worked.
I believe it is because most are developed the wrong way. Too many rules, too much optimizing, improper data sampling and data mining, improper accounting of slippage and commission, bad assumptions about order fills,etc. Garbage In, Garbage Out as they say.
The end result is a great backtest that can sell the system to the unwary public, but will never work in the real world.
Broker: AMP/NinjaTrader/CQG/Kinetick/Tickdata, Inc.
Trading: ES. ZB
Posts: 7 since Jul 2010
Thanks Given: 4
Thanks Received: 8
"The end result is a great backtest that can sell the system to the unwary public, but will never work in the real world. "
Very true. Years ago there used to be a "Club 3000." Systems used to cost $3000. Big Mike probably knows what I'm
talking about. The club critiqued the various scams, oops, I meant systems.
I am 72 and several years ago I finally figured out the "secret"--it's all about money (and also power).
For what my view is worth, I think in the context of the poster's question, this is the most accurate answer. The issues experienced lie mostly with the software.
These are situations I have observed during live trading.
These are conclusions I have come to after comparing backtesting with live results. I observed more slippage at certain times than others.
The exchanges use sophisticated algorithms to fill all of the orders and this can push the orders around wildly in the lineup.
Do you think tick data being backtested demonstrates accurately how those orders are being filled ?
I dont think it does.