How do you know when successfully backtested strategy will succeed in real trading?

[sle]

In contrast, if your trade method is 100% automated...the results of your back test will be more realistic about what you expected in comparison to a trade method that's not automated.

Actually, back test is almost always just a glimpse at the value of the strategy/trade, regardless if the strategy is fully automated or semi-discretionary. There are so many factors that are hard to take into account that usually it makes sense to go live in tame size and take it from there.

 

[murray t turtle]

You'll be surprise by how many traders used the work "back tested" when in reality it was not properly backtested. Also, real money trading involves some elements that can not be duplicated in a back test.

This forum ET is litter with trade journals that have poor real money trading results in comparison to very profitable back test results. Some where in fact green (profitable) in back test but red (losing) in real money trading.

How do you know its going to work in real time ?

There's no guarantee and you must start with small account or small trades to see how the method performs with real money. Also, best to include simulator trading between the back test and real money trading just to become familiar with the trade execution platform.

In contrast, if your trade method is 100% automated...the results of your back test will be more realistic about what you expected in comparison to a trade method that's not automated.

%%
I agree automate plenty; + dont forget the discretion, on which market to trade, because most wars are not won in 50 /+days like operation Desert Storm.

 

[2weels]

sle, I apologize for responding to your answer with more questions, but my hesitation is over-ruled by my desire to understand.

What do you mean by
"structural reason"
"theoretical"
and
"regime"

Thanks much.
Jim

My personal "parameters" in order of decreasing importance
- the trade/strategy has structural reason to exist
- the trade/strategy has theoretical edge
- the strategy has few free variables that can result in a curvefit
- the strategy back test spans a period that includes different regimes

 

[2weels]

Yes, I'm only going full auto (with monitoring). I definitely do not trust myself. I once did some stock trading the old fashioned way, and lost a significant amount of money before wising up and quitting.

You'll be surprise by how many traders used the work "back tested" when in reality it was not properly backtested. Also, real money trading involves some elements that can not be duplicated in a back test.

This forum ET is litter with trade journals that have poor real money trading results in comparison to very profitable back test results. Some where in fact green (profitable) in back test but red (losing) in real money trading.

How do you know its going to work in real time ?

There's no guarantee and you must start with small account or small trades to see how the method performs with real money. Also, best to include simulator trading between the back test and real money trading just to become familiar with the trade execution platform.

In contrast, if your trade method is 100% automated...the results of your back test will be more realistic about what you expected in comparison to a trade method that's not automated.

 

[sle]

Structural reasons - somehow the world is set up in such way that something is mispriced. For example, implied volatility is over-priced because the institutional investors are forced to hedge big downside swings. These dislocations are usually very stable and will persist for a while.
Theoretical edge - for example, if two securities are supposed to converge at some point or have a theoretical relationship that is dislocated. For example, if you can buy a bond and an equity put on the same company with the same maturity in such way that the yield pays for your option. It's not a true arbitrage, but your chances of making money are better than average.
Regimes in general refer to the repetitive behavior of some market. A simple case could be "trend vs chop" or something like that.

sle, I apologize for responding to your answer with more questions, but my hesitation is over-ruled by my desire to understand.

What do you mean by
"structural reason"
"theoretical"
and
"regime"

Thanks much.
Jim

 

[2weels]

Mr. Turtle, I sense that that sort of discretion comes with experience. I'm working on it though.

%%
I agree automate plenty; + dont forget the discretion, on which market to trade, because most wars are not won in 50 /+days like operation Desert Storm.

 

[2weels]

Thanks very much sle, that is all clear.

Structural reasons - somehow the world is set up in such way that something is mispriced. For example, implied volatility is over-priced because the institutional investors are forced to hedge big downside swings. These dislocations are usually very stable and will persist for a while.
Theoretical edge - for example, if two securities are supposed to converge at some point or have a theoretical relationship that is dislocated. For example, if you can buy a bond and an equity put on the same company with the same maturity in such way that the yield pays for your option. It's not a true arbitrage, but your chances of making money are better than average.
Regimes in general refer to the repetitive behavior of some market. A simple case could be "trend vs chop" or something like that.

 

[murray t turtle]

Mr. Turtle, I sense that that sort of discretion comes with experience. I'm working on it though.

%%
Amen Mr Tweets;
getting hands dirty with data a help$,2.Sometimes i hand draw a 50 day moving average + weekly candlechart........, even though autodrawn looks better- neater + more cool LOL

 

[algofy]

how do you know if your successfully backtested strategy is going to work in real time?

By trading small size live market for an extended period of time.

 

[piezoe]

The only things that I can think of that backtests cannot test for is execution quality of your trades. In backtests the execution quality of the trades is always 100% instantaneous; there is never any lags, delays, liquidity problems and etc. whereas in real trading, you are going to face all of these problems and execution quality is never 100% as reflected in backtests. If the success of your trading system is heavily relied upon execution quality then your backtest results is going to differ from real trading unless the execution quality of your platform and your broker is extremely close or exactly as how it's in backtests.

I completely concur with JSOP's post above. Anyone relying on simulated trades must be beware that some simulation platforms give notoriously unrealistic fills. As just a single example, I'm certain there must be others, the TD Ameritrade-Thinkorswim platform, an excellent platform overall but one not well suited to short-time-frame trading, will fill simulated buy orders on the bid and simulated sell orders on the ask. The exact opposite of what happens in most retail trades. This is not so important in testing trading schemes on longer time frames but it completely invalidates any results for short time frames. You will also find that under this kind of fill you are a trading genius, in fact you're a market maker! You can partially compensate for this by making the result of any simulated trade two ticks worse.