The next question from Chris B. (name used with permission), who’s using the Strategy Cruncher to create an intraday system that trades SPY (details here).
Chris B.
Do you include the entire history of a backtest or a more recent subset?
Dave
Backtesting is a confidence builder.
You’re building confidence in your idea for the trader you are now, which is really valuable, but it’s not the most valuable part.
Your backtest and the decisions you make about rules for your strategy are really for your future self, when the strategy is in a drawdown and you’re wondering whether to give it up or not.
Every trader who ever quit did so during a drawdown.
And they quit because they didn’t have confidence in their system to keep trading through the drawdown.
The backtesting decisions you make now will help you have confidence during that drawdown.
When you’re in a drawdown, do you think you’ll say to yourself, “Man, I wish I would have backtested on a smaller set of trades.”
Of course not!
You’ll want to have as much perspective as you can have.
So I start with the entire history that I can feel confident in.
For a strategy like Chris’ that trades a single instrument, you’re going to have to go back a long time to get the number of trades required for confidence.
For a strategy that trades many instruments (or the entire market), you don’t have to go back too far to create a backtest with a lot of trades.
So my default approach is to gather as much data as possible.
You can always trim down or exclude a period (like we discussed yesterday).
Great question, Chris B. – thanks for sharing.
-Dave
P.S. The Strategy Cruncher is like having a cheat code for your trading strategy. Here’s what Matt H. said about the cruncher:
“The cruncher suggested a few filters for my strategy. I plugged them in, ran the back test and WOW! 20% improvement in total profit, and with another, a significant reduction in drawdown. I recommend this for anyone truly serious about optimizing their strategy.”
