Quote from jeffalvinson:
But there is a serious fundamental flaw in backtesting using the Open, High, Low, & Close with historical data.
Here it is:
Real Example from Friday 10/26/12 on SPY Call option:
Option.......Open.....High.....Low......Close
NOV142C...1.86......2.04.....1.49..... 1.83
(all exchange data only records those prices)
Lets say the above data was older data and your testing your new trade system for a call trade on 10/26/12 with the following trade parameters:
Buy Limit: 1.55......Sell Limit: 1.95 (+25%).....Stop: 1.15 (-25%)
Looking at the old data above:
You have no way of knowing if the "Low Price"occurred before the
"High Price" ????
Without knowing that piece of intra-day information you cannot
assume the low occurred before the high, so you have no choice
other than to record your test trade as filled (Buy Limit: 1.55)
"but holding overnight."
Now the next day after holding this call option the markets could
have gone real negative....took out your Stop: 1.15 (-25%) and
you had to record your back-tested call trade as a Loser!
The "reality" of what really happened on Friday 10/26/12 was
this:
Option Opened at 1.86....and then tanked to 1.49.....and then
rallied to 2.04.....and then pulled back and closed at 1.83.
So your test trade was actually a winner but without intra-day data you are forced to record it as a loser.
As far as I know in the last 15 years, all exchanges only record OHLC.
This type of inaccuracy can effect a back-tested system's results by a rediculous amount.
The best thing to do is simply test a new system forward for about 1 year before drawing conclusions.
Jeff
Quote from jeffalvinson:
Ricty & Prevail,
You have both asked if this would work with futures.
The answer is no.
The programs are designed to look at both sides of the market
data: long & short (call and put) .....with respect to these specific formula's within the programs.
However if I had several months of historical data (open, high,
low, close) for the call and put options on the futures,
it is possible that it "might" work with the options on the futures. I say "might" because:
Operating parameters in the formula's are specifically set for call and put options with closing prices is in the 2.00 to 3.00 range.
Percentage value markers are assigned to formula programs based on 2.00 to 3.00 option values.
The most "relevant question" is,
would those percentage value markers still carry the same significance with options priced significantly higher?
In other words, does a higher priced trading vehicle create the same percentage moves within its data as a lower priced trading vehicle?
Quote from OddTrader:
You now clarified my understanding that you must get intra-day prices of all strike for their options in order to carry out meaningful backtesting, don't? Otherwise the only way to do is realtime forward testing, as you mentioned above.
That means, before any forward testing, the answer is simply Unsure for trading futures or any other markets/instruments, I would guess.
Quote from jeffalvinson:
The trading program
is 70-75% accurate over several years.
Quote from jeffalvinson:
Opened new trade:
SPY Dec 141 Calls
Buy No. 1: 1.70 (filled)
Sell Limit: 2.25 (32%)
Buy No. 2: 1.30 (not filled)
Sell Limit: 1.82 (40% + 7%)
Stop: 1.15 (-32% + - 12%)
Maximum Potential Profit: 47%
Maximum Potential Loss: -44%
Quote from jeffalvinson:
Step 4:
However if the trade program outputs a confirming new signal
to the open trade, I then have to monitor my trade station
while attempting to get filled on Buy No. 2 (B2).
B2 could fill quickly, take all day to fill, or not fill at all.
If and when it fills, I can then combine B2 contracts with B1 contracts, create a new OCA with different Sell Limit and lower Stop and leave home until evening.
Step 5:
Is a repeat of either trying to get B2 filled, or if its filled placing an OCA order again and leaving.
Only if I get to Step 4 and I am holding an older same direction trade do I have to watch for Buy No. 2.
If a trade gets sold or stopped during Step 1 to Step 3,
there is no monitoring necessary and I can go fishing.
80% of the trades are sold or stopped during Step's 1 thru 3.
Jeff
Quote from rfriend73:
Jeff, I was curious why you trade the SPY options vs ES futures ?