If you’ve known me for any length of time, you know how I feel about backtesting – it’s your trading superpower.
Even traders who fully understand this get stuck in the backtesting mud. I’m pretty sure this is the default state when traders start backtesting.
Imagine trying to pierce a bullseye on a target from 400 meters away.
You could try using a slingshot or throwing a dart – those are good tools for similar tasks, but they won’t be much help here.
Some will recognize that a sniper rifle with a powerful, well-calibrated sight is the right tool to accomplish the goal.
Now imagine the people who have a sniper rifle – the right tool – but they’re using it blindfolded and they don’t realize it.
You may as well be using a slingshot.
And yet, almost all traders I come across who backtest are like the people using a sniper rifle blindfolded.
This series of emails will show you how to backtest so that you end up with a strategy that actually works and doesn’t just trade market noise.
This is a wide-ranging topic, so here’s how I’m planning to organize it.
First, we’ll go over strategy creation in general, then we’ll move on to specific backtesting software.
After you have a working strategy (according to a backtest), we’ll go over the next steps and how to implement it.
Tomorrow I’ll go over the first step, before doing a backtest or writing any code.
This is the step where traders put the blindfold on without even realizing it.
-Dave
