Back Testing....."Paradoxically" Speaking

Discussion in 'Psychology' started by Rogue Trader, Feb 5, 2002.

  1. Of all the paradoxes that exist in trading, the notion of “Back Testing” could quite possibly use some “Back Testing” of its own. The literal meaning of “Back Testing” is rather self explanatory and actually defines itself with little explanation. “Back” is referring to past occurrences and “Test”, is a trial of a model.

    Regardless of the level of sophistication, rigidity, flexibility, or time frame of your model, you help to define it and ultimately accept it. You are simply testing a method against past occurrences and analyzing the results. Conventional wisdom supports that the result of such testing can be optimized, and
    when applied to the future, produce a positive expectancy. None the less, one obvious fact still remains. The market, which is what your modeling into, remains a variable. Upon further scrutiny though, a less obvious change also occurs. Your perspective. Unknowingly, you have begun to reinforce in your mind what should happen as a result of your positive experience in literal backtesting.

    Once satisfied with your results, your back tested model will still require one more trial. A trial by "The Here and Now.” You have learned the literal definition of back testing above. It is now time for “You the Trader” to learn the traders definition of
    back testing. In the traders definition of “Back Testing”, “Testing” simply means to put on the trade, as dictated by the system of your invention. "Testing" remains constant and mechanical as a function of your system. “Back”, on the other hand, is actually a variable.

    Now with everything to your satisfaction and your methods in place, your back tested system triggers a trade and your day of discovery begins. This is what you can expect to discover. Everything you thought your system to be, wished it to be, hoped it to be, ever dreamed or believed it could be is absolutely irrelevant under a trial by “The Here And Now”. Go back and read that again.

    Enter “Back”, the variable of the traders definition of “Back Testing”. Under a trial by “The Here And Now”, once entered into a trade, you are given but 3 choices. But wait a minute. This is strange. None of choices are related to the literal definition of back testing, or the positive "perspective" from which you saw your trades resulting in. “Back” (traders definition) becomes to mean.....

    1) Back Off 2) Back Down 3) Back The Hell Out.

    Back Off: This refers to reduction of trading frequency.

    Back Down: This refers to reducing your share or contract size.

    Back The Hell Out: It means just that. Neither you nor your system are in the flow of the market. Get out and re-enter when
    conditions improve. Both yours and the markets.

    There in lies a paradox of back testing. From the traders definition of "Back Testing" you derive a finite and constant set of prepared responses on every trade, every time. From the literal definition of "Back Testing" you derive a deceptively skewed departure from "The Here and Now". You only see what should happen, not what could happen.

    Now ask yourself this..... If the correct response to any trade is a constant, regardless of all the variable methods, signal generators, systems, and market conditions, where does one find a constant? The answer is quite simple. You become the constant, constant "WITH" the market.

    It is one thing to say you trade the markets. It is something completely different to say you trade "WITH" the markets. If you have a bias, a belief, or behavioral response from the past, regardless of origin, of what the market will do, should do, or could do, you are not trading "WITH" the markets, you are trading your past perspective of the markets. The day you decide to trade the markets perspective in the moment, and not yours, is the day you will be trading "WITH" the markets.

    Oh, by the way. There is one more definition of “Back Testing.” This one is provided to us courtesy of the markets. It is for all those traders who choose to ignore the traders definition of back testing. The markets actually re-structure “Back Testing” to “Backer Testing”. Backer testing occurs when you, the trader, have to go out and find new ”backers” to fund your account, the one you just blew up, as you chose to “test” your trading account for the sake of “Back Testing.” Literally, that is.
  2. Miki


    Rogue at his best. Excellent post.
  3. Human behavior is not continuously novel. Patterns exist, and by definition, repeat. Individual belief on each individual trade will cloud vision. Belief in a system over time can be proven via probabilities...a trader's P&L.
    There are many who understand each individual trade is a random event, yet the outcome overtime is predictable.
    "Trade what you see, not what you think." would have been sufficient.

    Discretionary is my method, yet your loquaciousness is unnecessary. I loved this one...
    Why do you feel the need to talk down to the contributors and readers of ET? For that is the tone that you offer.
  4. dozu888



    Backtesting is about discovering reflection of human nature (which is quite constant) through price action, and find ways to limit risk.

    You sound like somebody put together (or bought) some ovre-optimized system and blew up. Look at the systems that have endured the market for a long period of time, (e.g. Aberration for commodity futures), they are so simple you can describe it under 60 seconds.

    Any system cannot be defined under 60 seconds is over-optimized.
  5. that's why you forward test also...
  6. tom_p


    ...yet your loquaciousness is unnecessary.

    Rogue Trader's profile reveals that he registered for membership on September 7, 2001, yet posted for the first time 4 months later on January 7, 2002, and till now (after almost 5 months) has a grand total of 6 posts to his credit. So, Barbarian, instead of wasting half your post unfairly singling out Rogue Trader for broadband and literary inefficiency, engage him in pertinent debate.

    "Trade what you see, not what you think." would have been sufficient.

    Only if you prefer reading 3-page trading books. The oft-quoted 90% trader failure rate would indicate that these 8 word maxims need all the amplification they can get.
  7. to the post, not number of posts. Why would you jump to conclusions about frequency rather than length?

    Simplicity leads to understanding, especially in trading.

    Unfair? 90% failure rate may be considered unfair by some yet seems completely reasonable to me.
  8. tom_p


    I am fully aware that you were referring to the length of his last post. You must be extremely frustrated reading EliteTrader posts in general if you yearn for simplicity and economy of words.
    BTW, this is your first post before 12 midnight (EST USA) - are you from Europe? Is this also connected to the fact that you trade the last 100 minutes only, as expressed in the interesting Veritas post?
  9. if I have posted before midnight before. Probably not.
    I only trade the last 100 minutes because I only need one point a day, and GNSS and QLGC nearly always give me one point those last minutes.
    Not frustrated, just thought the post was pretentious, that's all.
  10. barbarian, interesting and unusual strategy. would you elaborate as i am always looking for ways of working less (and partying more:)
    #10     Feb 5, 2002