Did you know that trading systems with simple, clearly defined rules not only outperform systems with complex and numerous rules but are also more robust?
HFT, and is backtesting helpful or harmful?
- Thread starter Dustin
- Start date
Did you know that trading systems with simple, clearly defined rules not only outperform systems with complex and numerous rules but are also more robust?
I was talking to a friend of mine who worked at some firm in Atlanta, he also described the reverse process, where by programmers and stats guys become traders. So it has the potential to work both ways. I guess the important idea is that the two things are usually distinct processes, good ideas come from experience and knowledge, not from twiddling moving average lengths.
Back in early 2003 I wrote some FX systems thru TradeStation and RINA software based on ATR volatility breakout parameters that back-tested excellent in GBPUSD, EURJPY and GBPJPY in particular, pretty good in EURUSD and USDCHF.
The risk/reward parameters varied amongst each due to different dynamics, but for example the GBPUSD system used a -90 pip stop and +200 pip profit exit. Exhaustive testing of trailed stop tactics proved any such attempts diminished returns and average profit per trade size. Simple systems... price broke out of assigned ranges, either continued on to profit objectives further or backed up and stopped out.
These systems never walked forward as ideally as they backtested, which is completely normal for systems trading. But they were net-profitable for the next decade albeit with periods of large drawdowns sprinkled in. I don't know if they were literally tradable due to the large drawdowns between consistent new equity peak highs over time, but they walked forward in positive fashion.
Until about a year ago. That's when these range-break and price expansion systems went from undulating profitable to straight down red and dead. Can you guess why back-tested results from 1998 - 2003 and then walked forward results from 2003 to 2013 that were all net profitable in testing have suddenly ceased working and collapsed?
As I have said, I used to trade the small caps too for many years and six figures were just about the norm. Actually I think we might have a similar strategy. Since 2009 things have started to simply "disappear", I tried to transition to very liquid stuff using a completely diff strat with varying results.
That's the situation, Bob. Things are not going to get any better in this space and the only alternative is stick with it and make walmart greeter's wages, get a job or just radically do something different. I mean, what is the alternative?
1) Your loss to HFTs is proportional to your trading frequency (unless you are faster). If you define "daytrading" as one round-trip trade per day, my answer is still "yes, you will lose, but an insignificant share of your overall profit"
2) I cannot imagine doing any kind of trading without first backtesting. Your pre-assumption that your trading is "unprofitable" is a clear indication that you should keep your hands off any kind of trading before you can confidently claim the opposite. Use your hard-earned money in better ways, for instance on drugs or prostitution (I'm not kidding).
A backtest reveals that system A has been returning 10% a year on average for the last 100 years, while system B lost 10% a year on average for the last 100 years.
So you want us to believe that you would have no problem trading system B because the 100 year long backtest says nothing about the next week, is that it?
There is NO past or future in backtesting!
If you forward test from January 1, 2013 to January 31, 2013, the year 2013 simply becomes a backtest year in 2014.
Forward testing is an illusion, the "fresh" data you are using are also an illusion because in 2014, data from 2013 are now part of the backtest and belong to the "past".
Get it?
I didn't say any of this. You set up a strawman argument and knocked it down. I don't think you understood what I am saying. Why would it matter to you so much if I lose a bit of money in my trading or if I do a "bad" thing by not backtesting? It doesn't matter to me at all.
I have no problem with anyone backtesting if they like, but I am more like Dustin in my temperment. I really do trade live with small positions on ideas that I come up with to help refine ideas. However, I reject most of the common ideas instantly and know a lot about all phases of trading and investing. As I said before, for me, it is more about why an edge exists than any particular edge.
+1
When I work out a trading methodology, I always take into account who is selling to me and why. When one thinks that way, there are fewer ideas, but also more sound ones. Backtesting is very problematic even if done properly. I guess I don't consider the effort worth it.
Perhaps we are basically talking about system traders and discretionary traders. I trade using principles and not rules (set down by the market Gods on clay tablets). LOL. Trade management and risk control are more important to my style of trading.
well... at least i didn't blew or piss away those profits. that will give me a lot of time to sit down adjust to a situation. as of now- i'm working(backtesting included) on few ideas,but i'm not overly optimistic about those projects. can't explain why,but i lost the interest in trading. i guess-burned out after years of daytrading..can't take\tolerate any stress anymore,unless i design something that i really like(described above).
1) Has your trading been consistently profitable?
2) If so, for how long and how profitable (specifics, please)?
No offense, but I've never met a discretionary short-term trader who could prove their profitability via account statements or results from a third-party site. At least not for the long-term. Backtesting can have pitfalls and be worthless without proper safeguards, but it's far better than thinking you can outsmart the market on your own. Pretty much every discretionary trader I've met is a walking example of behavioral finance fallacies (overconfidence, anchoring, confirmation bias, etc.).