To simulate past strategy performance, Iâd always rather use tick data than bars (actually, Iâd rather reconstruct the whole order book to simulate order queue position, but itâs not always an option).
IMHO bars introduce significant extra uncertainty versus ticks when analyzing realistic entries and exits. Did the barâs High come before the Low, or vice versa? Was the High a single, low volume tick gapped way above the next highest tick, or was there significant volume at that price and at the adjacent price levels just below it? Etcâ¦. Sadly though, sometimes only bars are available (no tears please), and thatâs what has to be worked withâ¦
So, what ârulesâ do other bar backtesters use to anchor their strategy research firmly in the land of the realistic? For example, I am thinking of stuff perhaps along the lines of: Only allow for a simulated entry/exit in a bar if that barâs volume is at least N times the proposed strategy position size. Or, unless this is the case, for a long market entry (or a short market exit) always assume the fill was at the barâs High (too pessimistic, perhaps) ? Or for a limit order, that the limit order would not have filled unless ⦠? Etc â¦
Any thoughts?
[And BTW, I know the âonly way to really know how a strategy is going to perform is to trade itâ⦠but that given, I also believe that âbacktest-then- forward-test-then-trade-small-then-tradeâ is also a valid part of the strategy R&D cycle⦠which is why I am looking here at bars and backtestsâ¦]
IMHO bars introduce significant extra uncertainty versus ticks when analyzing realistic entries and exits. Did the barâs High come before the Low, or vice versa? Was the High a single, low volume tick gapped way above the next highest tick, or was there significant volume at that price and at the adjacent price levels just below it? Etcâ¦. Sadly though, sometimes only bars are available (no tears please), and thatâs what has to be worked withâ¦
So, what ârulesâ do other bar backtesters use to anchor their strategy research firmly in the land of the realistic? For example, I am thinking of stuff perhaps along the lines of: Only allow for a simulated entry/exit in a bar if that barâs volume is at least N times the proposed strategy position size. Or, unless this is the case, for a long market entry (or a short market exit) always assume the fill was at the barâs High (too pessimistic, perhaps) ? Or for a limit order, that the limit order would not have filled unless ⦠? Etc â¦
Any thoughts?
[And BTW, I know the âonly way to really know how a strategy is going to perform is to trade itâ⦠but that given, I also believe that âbacktest-then- forward-test-then-trade-small-then-tradeâ is also a valid part of the strategy R&D cycle⦠which is why I am looking here at bars and backtestsâ¦]