Even a monkey could construct a simple system based on technical analysis, backtest it and show at least a small profit. If it were this easy, why doesn't everybody do it? We know slippage and commissions eat into the profit... but what's the catch about backtesting? How realistic are these numbers?
The reason everyone does not make money usually comes down to discipline. Many traders have a trading methodology that could be profiable a majority of the time, but lack the discipline to rigidly stick to it. Not to mention the fact that the market is dynamic and a good system needs to take this into account or it will eventually stop working. So my vote goes for discipline being "the catch."
It is that easy. The simplest system I know constructs a horizontal line at the current price and is long above it and short below it. You cannot refute it. Check it out for yourself. Overlay a horizontal line on any chart, any time frame. Is there profit opportunity or not? As stated in a previous post, trader discipline is the most confounding element of a trading system. This is why system sellers can sell systems and the performance of the system is not 'diluted'. No matter the rules, two traders will usually not trade the system identically. One rule that cannot be broken is...
I for one am in favor of working to make the system as simple as possible. And as for backtesting... I prefer "forward testing". You can paper trade your ideas (so long as you don't cheat on them... and we all know how easy that is). Then, if 1/3 of your paper trade results would be good work for you... give it a go with real $$.
One thing I have found from traders I talk to ( and myself on occasion ) is that when trading a system one big downfall is outthinking the system. Once you trade a system for awhile you think you "know" not only when it will work, but when it will fail. Often you will enter when system gives you a signal but allow yourself to exit ahead of the target because you "saw" something you saw before when the system took a stop. This is just an example of "outthinking" the system. Most traders not only lack discipline but they lack faith in a system that may tell them to do one thing when they think another. Just a thought. AllenZ
OK, let me add a few reasons to the pot : - backtesting code is tricky to write. so you need very qualified people to R&D a system. not everyone can do this properly. even for a simple system, you need to code properly slippage, execution and system failure. - nothing works forever. that is misunderstood sometimes. it means a system usually work well in some market conditions and should be break even in other conditions (bad systems just break down). so a system must be monitored to check that it is 'within parameters'. - backtesting must be done with good data for long periods of time. a reason to fail is using too little data. forward testing only (without backtesting) is a very, very, very bad idea. - backtesting done with known outcome (so cheating) will fail in real life. it seems silly, but that's the one of the most common mistake. one code a system with a few indicators calculated on close value, but enters within the bar. during backtesting, both the close and total bar is known. in real life you don't have all this data. if your system counts on it and enter in the same bar, you will lose your shirt. that goes back to my first point : it's hard to code. (.. need to go back trading. There are other reasons, but maybe later. anyway, don't be fooled, backtesting works as well as system trading. but it's not for everyone imho )