Good on Paper, Bad in Reality

C

Corso482

I have a system that looks beautiful on paper. Runs off the 2min charts, avg. profit is about .4%. It works on any high volume stock. With no margin, it returns about 70% a year. Backtests well since '98 (as far as SWP can go).

I'm not so naive as to think these returns could be achieved in reality. They'd probably be substantially worse.

Given my lack of real trading experience, I'm curious-- what factors would make a good paper trading sytem a bad system in reality?

How would spreads affect me? With only .4% avg. profit, I'd imagine I'd be taking large hits from spreads alone. How about execution, especially with shorting? Is shorting stocks on a 2min chart problematic? Does the uptick rule become a problem?

Thanks for the help.
 
Quote from Corso482:


How would spreads affect me? With only .4% avg. profit, I'd imagine I'd be taking large hits from spreads alone. How about execution, especially with shorting? Is shorting stocks on a 2min chart problematic? Does the uptick rule become a problem?

More...

With high volume stocks, the spread is usually a penny or less, so that shouldn't be a problem. If you use limit orders for entry you get no slippage. (Although you run the risk of not being filled in your trade time window)
If you market order out for an exit, you'll see slippage. I like systems that hit the bid or ask with a limit order for exits. Again, if you're trading high volume stocks, your slippage usually will only be a penny.

Shorting isn't a problem with high volume stocks either, especially with naz issues. Lots of upticks, all the time. Sometimes an NYSE short takes several seconds, but I get delays whether I'm going short or long there. (time for an all electronic marketplace NYSE!)

Hope this helped,

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