backtesting is accurate to a certain extend if you did not over optimise it. I can easily sell you a system that work well in a backtest enviroment. In the system there can be 10 - 20 parameters to set. I can easily come up with this system in less than a days. Pay me $500 and tell me what markets you like to trade. I will give you the system with oer 80% hit rate and low drawdown. If you want 90% hit rate I can do it also. Would you dare to trade that system?? You can forward test a system. 2 way, First, the lazy man way is when you decide to backtest a strategy you hide the last year of data, example for now I would test my system from beginning until Jun 2003. From july 2003 - May 2004 (this will be untested and can be consider a forward test) Second, you run your system everyday and see the signal and paper trade it. I love this method since I can track the signal and find if there is any bugs within it while I am doing paper trading.
and it appears to be great, Keep in mind that the 88-percent win rate is an average and it maybe higher or lower than that. The trick with systems trading is that 1) you should have a robust system (the RSI 25 is) 2) Must follow such system religiously. Any failure to keep these rules will result in losses and the opposite will yield long term positive expectation.
Hmmm.... Bollinger and Extreme-RSI ...err I mean RSI-Explosions I wonder how "similar" these are to the systems that are freely available on Wealth-Lab's site
Lets assume that this RSI25 is a different system to the WL RSI systems - which were BTW created by Lindq, and let us also assume that the RSI25 really works, i.e. mega win-loss ratio + decent profits (i.e. is tradable in the "real" world). First, you have to ask yourself why someone would be offering this to you for a paltry $250. Does it sound like complete bollocks or what? But of course, they are such nice guys, they are letting you have the system, practically for nothing. Word gets around (from ET of course) that this is a real stonking system and everyone starts using it. What do you think happens next? My apologies if this is obvious to most, but it appears to not be obvious to some. Then again its your dosh. Peace...
Being that win rate is total wins/total trades and changes with each trade, that leads to the next questions? What criteria is used for the average, like how many years of data? when was the highest curve of the average occurring? Michael B.
The Extreme RSI system I created a couple years ago on Wealthlab was very simple, and has, I understand, led to development of a number of similar systems that were further enhanced. At that time it was a basic, initial look at buying pullbacks. It was ENTER at TOMORROW's OPEN if today's RSI (10 period) is greater than 20, and yesterday's RSI was less than 20. EXIT at the CLOSE of the day that RSI crosses 45. The system is moderately profitable, particularly when traded on a list of high EPS stocks. It is not something I trade, but it led me to develop other much more profitable systems based on the same general concepts. It does illustrate what I feel are some very important ideas, and a good STARTING point for anyone who wants to swing trade. 1. Keep it simple. 2. There is value in buying extreme pullbacks on solid companies with good earnings and volume. Backtesting is criitical in determining levels at which it is statistically probable that a profit can be made. 3. Be creative with stops. In this case, the RSI serves as a stop and will let losing trades take themselves out of the game, but let winning stocks run a bit. 4. Trade for singles, not homeruns. It is all a matter of statistical probabiliites. The game is won with many 3-6% gains, not 20% gains. 5. Whenever possible, hold a diverse portfolio of "good companies". The winners will typically more than support the losing trades. Never, ever place a large bet on a single company, or hold past the system's exit signal. 6. When holding long, it is typically better to sell at market close than during the session, as a strong stock will usually remain strong through the close. I repeat that this is only a basic recipe and starting point for further development, which is how I put it to use, and I do not recommend that anyone trade these specific signals.
with your suggested filtering on "good companies", high EPS, etc, and perhaps waiting for confirmation of the stock's recovery, the Extreme RSI scripts required minimal changes to be tradable, more so to adapt to the trader's personality/preferences. Upward sloping equity curve on a large watchlist, moderate drawdowns. And lets not forget you gave the WL community the bollinger band system idea that has led to a myriad of derivative systems. Basically, your ideas started a bunch of us looking into mean-reversion from a different perspective (i.e., not necessarily stat-arbitrage/market-neutral mean-reverting strategies). Cheers.