Backtesting vs Simulation vs Actual Trading

Discussion in 'Strategy Development' started by StocksSniper, Nov 14, 2005.

  1. I've learn a lot from this website and spent almost a year doing an experiment and I just want to share my results.

    The point I am trying to make is:

    1- Backtesting can be far from reality (even when we didn't optimize much).

    2- Even real time simulation can be far from reality (partial fill, no fill, running out of capital a the worst moment, second guessing the system, busted trades, IB being down...). For the record I have nothing against IB. I love them actually.

    3- Nothing gives more confidence, learning than real trading. And actually it grows your account and allow you to buy stuff.

    I think this is pretty standard, almost evrybody knows and I am not saying anything new. But what is different is that I am providing some data to show how the difference can be.

    I developped a system end 2004, and was very satisfyied with the backtesting results. I started trading this system with real money on IB, Jan 1st 2005 as part of my startegy.
    And at the same time I kept track every day paper trading this system, assuming that every time I get filled perfectly, I didn't second guess, they were no down lines...

    If anybody did a similar experiments, feel free to post your results.

    Here are my results:
  2. Here is the realtime simulation results for 2005:
  3. Here is the results of the actual trading:
  4. Hamlet


    Those real profits look pretty good (they are real?) No reason to be unhappy with that.

    EDIT: I did not see the real money post before my above post... now I can see that you added it in there and are doing 25% of the sim in real money. I still think it's not bad and can probably be improved.
  5. As you can see Backtesting was showing that somebody can make >$700K a year using this system, with minimal drawdown.

    However, once traded for real with real money in the line and trades being only partially filled or not filled, wrong trades entered... The profit was only $160K with a drawdown as high $48K.
  6. Hamlet,
    I am very happy with the profit and about my overall strategy.

    However the point I am trying to make is that the difference between real trading and Backtesting is huge.

    Notice that at one point in time I gave up almost half of all the profit I made (from >$100K to a little over $55K).
  7. Hamlet


    What caused those bigger dd's in real? What is the gross per share?
  8. Hamlet,

    I traded around 2,000,000 shares. So, I guess my net profit per share after commissions is somewhere around $0.08
    Now that I am thinking about it, it is pretty low :(.
    This is not scalping, it is day/swing trading...

    These big DD are due to my system giving me a streak of losing trades over a very short period of time. You notice that even the simulated trading has a big DD.
    The DD are differents because I second guessed the system. which sometimes ended up being a good think, but overall it would have been better if I never second guessed it.
  9. sulli


    Congrats! I think you have done some great work!

    Q: Are you manually trading your system or have you automated it, allowing software to fire off orders to IB?
  10. maxpi


    Nice work. I recently did some simulation work and got good results, then I noticed that my biggest % gains occured with situations where I probably could not have gotten much $ into the trade and the losses occured when I could have put a lot of $ into the trade. I had to re evaluate the whole thing and came up with a difference similar to the difference between your backtest and forward test. If I ran it with real $ I would probably see yet another level of reduction in results similar to yours due to slippage and missed trades.
    #10     Nov 15, 2005