So I have been doing some basic backtesting with various indicators like moving averages and stochastics I but haven't been able to get any satisfactory results. My profit:loss ratio barely ever creeps above 1:1 or 2:1. I've also tried to compare it to candlesticks over the period, but they sometimes give many false signals too. So I was wondering whether its a matter of selecting the right period or eyeballing it from the charts, or what? I've tried daily and weekly periods on my indicators using fibonacci numbers (3, 5, 8, 13, 21, 34...). But really, it seems like I'm just trying to fit the data to get a return I want. So unless I get something like a 90% accuracy with technical indicators, I probably won't be convinced with my own backtesting analysis... Appreciate any advice on this. Thanks
90% is unrealistic, even for a "good" system. In any case, you should congratulate yourself that you are performing backtests which are giving you accurate results and demonstrating that the indicators you are testing are largely worthless. Initially, this is a difficult conclusion to accept because TA indicators are so often touted as useful. But don't feel like you've wasted your time, as your backtesting has saved you money by not sinking it into stuff that doesn't work. Take some satisfaction in that and move on to explore alternatives.
I don't expect you will find anything with that level of accuracy. There is an art to using technical analysis in a way that gives you an edge. Indicators work differently in different market environments. I'm a Chartered Market Technician (CMT) and Ibelieve you have to incorporate different types of indicators (trend, momentum, sentiment, cycle, etc.), multiple time frames and then use the indicators in unique ways to be able to get an edge.
Whenever a couple of indicators gave me a signal, the next day the price moved in the exact opposite direction. Just to compare, i loaded up several indicatoes to check and they all gave false signals during that price movement. Even with long periods, whipsaws seem to be unavoidable... Sometimes the indicators were right. Sometimes not. I've been mainly looking at daily trades using 15min, monthly and yearly charts. Not sure if I'm looking at this the wrong way.
IMO, stop backtesting. Carrying on as you are will only result in frustration. Your approach is naive trial and error, whereas a sound hypothesis based on a sound understanding of your market should be your starting point. The best use of backtesting is to test a theory, but you don't have a sound theory, so study until you do. Indicators have their place, but should be treated as secondary to your direct interpretation of price and volume. It sounds like you're ~ 1-3% of the way to becoming a profitable trader, and from here it could be many months before you're ready to begin trading. What's your trading education been so far?
Worthless in the way he uses them, but therefore not totally worthless. Good indicators that are used in a wrong way become bad and worthless indicators. That's why developing a good system is so time consuming. You never know whether the indicator sucks or your analysis of the indicator sucks. I already dumped (self developed) indicators as worthless, to find out later that the indicator was good but I used it in the wrong way. After finding this out the worthless indicator became more of a priceless indicator.
Even if you reach 90% accuracy (wins) with technical indicators on backtesting, you will not reach the same accuracy with real money trading unless you're 100% automated from entry to exit. Simply, backtesting is not able to duplicate YOUR reactions when you're trading with real money as a discretionary trader (a trader not automated). Therefore, no matter what your results will be...YOU are still the key when it comes to real money trading...more important than your technical indicators. There are many journals at this forum with the above problem. High win rates on backtesting but poor trading results when the trader traverses into real money trading. Its a psychological thing...the way the mind reacts to stresses when money is on the line.
Exactly! I trade as a discretionary trader, and I'm happy if I can catch over 70% of the profits that are generated in my system. My "human factor" has a negative influence on my performance.
Unlike the way I learned how to day trade which an ape would have done better, You have to study charting till any experienced trader can ask you a question and you don't have to think about the answer even if your timeframe is longer. Indicators are best used after you understand charting, and they are used to indicate, but they do not foretell the future nor will charting do this. Forget returns, you are years away from this imaginary concept. Very seldom have in my years been able to use one indicator for both entry and exit where many fail to realize. Only indicators that I made and combined usually price and or volume have made my indicator work for entry and exit. What most newbs and even experienced traders fail to understand what the indicator is supposed to indicate, they come up with clever reasons of why they don't work but they didn't spend years to understand, many have huge egos and can't fathom what they can be losing being so tight receptive to other components can work. It is better they don't hurt themselves and use them, more for me. Most traders do the same, they concentrate on winning percentages, so they work at better entries. But if you instead concentrate on losing percentages, there are ways to get down to 10% and lower, but much is based on charting and volume, plus hedging can get overall position to have lower losing percentages. Indicators carry least weight but excellent for what they will do, so will say MA is only for trend, can be used to show divergence, slowing down of price action, can show chop, can show better times to do counter-trend trades, will show when not to trade, and longer the period will show one needs much deeper retracements, longer periods better than shorter especially for newbs cause of overtrading, false signals, irregular patterns. Traders have to just plain study patterns and relationships of what happens when price hits patterns, you have to formulate a plan of what to do when at same time think if you were to get in where? and risk? How much time are you going to give it, time often works against the trader unlike options trader who sells. There are many nuances one has to think about coming up to a pattern, breaking out of a pattern, false breakouts-intentional or true reversals. I wish I could tell you there is one book that fits all, but there isn't. I have just started teaching my son on what to read, study, I have already sent him 75 pounds of books and my old journals and him being a Chess Candidate Master, he knows he will have to study long.