Monday, 9 August 2010

Lies, More Lies and Statistics Part 3

OK, we know what to collect but how do you do it?

It depends on how techno you are and what charting packages you have access to. The first thing you need is data. Enough data to back test. How much is enough? A year is good for short term trading. Just make sure that the data is clean and accurate.

To test a trading strategy, you can do it manually by printing out the charts you would use to trade going back over the year and manually marking the trades, both entries and exits, that meet your trading plan. You then need to add this information to a spreadsheet so you can calculate the results.

The other way is to create a trading system that can take the data and provide the information you need programatically. The problem with this is that the computer takes everything literally. Everything is black and white - no grey. The results will not be the same as your discretionary manual method but will be enough to validate what you are testing.

This information is a starting point. From the results, you will need to determine what the best stop loss is - the stop that lets the profitable trades through but exits the losers. Also, you need to work out what the best target is to take profits - the best target that also gives you a high enough win rate.

Next, the results need to be forward tested to see how stable your metrics are. Maybe you will need to make further adjustments.

No chart today, working on my option trading for my retirement fund.


  1. This is off topic, but I was wondering if you have any experience trading other commodities using your method? I've had a crude oil chart, using $0.05 range bars, up on one of my screens for the last two weeks and I like what I see. There's A LOT of movement, but I don't know if it's too much. Just today there have been 4 very clear and lengthy trends, whereas the ES has been very quiet. Trading breakouts also seems to be more possible, instead of primarily trading pullbacks.

    Of course these are the dog days of summer and maybe the volatility will become too much in the fall, but I was just wondering your opinion as I plan on doing some testing.

    I just can't ignore that $0.10 in crude oil is just as profitable as two points on the ES.


  2. Ryan, trading orderflow through momntum works with any liquid market. Using the right range bar setting is important to cut out the noise buy keeping the price action.