To say backtesting market data is not that important in "discovering" a career making profitable edge, is like saying a large quantity of data to be used in research is NOT that important in "discovering": the cure for cancer/how to clone animals/the causes of shizophrenia/etc. If someone is going to rely on forward testing alone, it will take 10 years to accumulate 10 years of Data, and they have to forward apply dozens and dozens of strategy ideas concurrenty. Backtesters on the other hand, don't have to wait 10 years, they can instantly drugde through years of data in a few hours/days/or weeks, and they can focus on checking ONE strategy/idea at a time. That being said, because of factors such as 1)humans percieving meaning in random chaos, 2)the absence of realtime factors/behaviors 3)waning attentiveness to pertinent detail while looking at chart after chart, there WILL BE PLENTY of strategies that will seem to have backtested successfully, but turn out to be a major dud once tested with real money.
First he states that proper testing is not sufficient, and then states he spent thousands of dollars a day to get programmers to test for him. Ummmmm ok??? Another poser who doesnt know what he is talking about.
It is normal that stop-losses destroy value. In order to enhance a strategy using stop-losses, you need a distribution of strategy returns that is bi-modal (i.e. with two peaks) or very strong auto-correlations. If you don't want to take risks, don't trade ! The "rules of thumb" have just no value.
Sci, please explain further. When you talk about bi-modal, what variable is on the x-axis assuming profit is on the y-axis? Also, I understand the concept of autocorrelation , but what is the significance of that in this case? Chuck
if i may answer. he means that if the profit histogram (i.e frequency of profits) is bimodal u would benefit from using stop - because u'll be able to "stop" the lower peak of the histogram. on a gaussian distribution u'll probably get worse results using stop.
traderDragon: For someone who is trying to learn how to backtest properly, could you suggest some books, etc.?
I agree with this both empirically (have observed it often) and philosophically (imposing a target price on the market has no value *to the market* (only helpful to your risk management calculations), so just imposes transaction costs). But:- This is interesting to me; on what basis do you make that statement? Is it empirical or theoretical(mathematical)? For example if we have a histogram of returns with one peak at, let's say, +$1000 and one at -$1000, it doesn't follow that by setting a stop somewhere around, let's say, -$500, we will increase the expectancy of the system, as far as I can see - the price paths are hidden in histograms. I also don't know exactly what you mean by saying that autocorrelations (in time series of returns?) give value to stops, but maybe I'm being dumb there
Vow. Yearly return of more than 200% with Sharpe ratio of 5. Is this for single-strategy or a portfolio of strategies?
If i am not mistaken that would be apx 100% returns unless you are factoring in compounding... none the less,outstanding