Here’s the common cycle of how traders approach backtesting:
- Have an idea
- Backtest a strategy
- Find out it doesn’t work
- Make tweaks and backtest again
- Use strategy if backtest is profitable
- Do steps 1-5 until a profitable strategy is found
What do you notice wrong with this?
While it does help a trader eventually find a profitable strategy, a missing step exists in this cycle causing traders to be stuck in an infinite loop.
That missing step is verifying an idea before backtesting it.
What do I mean by this?
Verifying an idea refers to finding out if an idea has value — in this context, value refers to exploitable statistics. This could be:
- The maximum, minimum, and average moves after a period
- How many times it appears in a day/week/month
- The difference in performance when filtering by days or months traded
Having this information lets you quickly find out if an idea is worth backtesting. Verifying an idea gives you a set of ideal parameters when you backtest so you’re not wasting time tweaking an inherently unprofitable strategy.
Lack of time is a major issue stopping traders from finding profitability
Most humans today have busy lives where they have to clock in and out each week and use their weekends to rest.
Finding a profitable strategy without idea verification can take weeks or months for someone busy — even if they are using AI backtesting software.
If the root issue of a strategy lacking value remains, backtesting becomes a process of trial and error instead of finding ways to maximise inherently profitable strategies.
Here’s an example to break it down…
Let’s say we have Trader A and Trader B.
Trader A:
- Finds a strategy they saw on YouTube that claimed to be profitable.
- Backtests it and finds out it’s not profitable.
- Continues making tweaks to find profitability.
- Engages in biased backtesting to enforce profitability.
Trader B:
- Finds a strategy they saw on YouTube that claimed to be profitable.
- Verifies the strategy idea to see if there’s value in it.
- Backtests the strategy with parameters suggested from verification.
- Has a profitable strategy and the option of tweaking it to maximise profitability.
Which trader would have an easier time finding a profitable strategy?
It’s Trader B – they are taking a data-driven approach to find a working strategy whereas Trader A is relying on third-party information to be correct.
TradrLab is the tool to verify trading ideas before backtesting them
The insights TradrLab generates let you know whether to continue or discard a trading idea in minutes. Say goodbye to the long way of finding a profitable strategy.
TradrLab provides the necessary framework to go from idea to bulletproof strategy…And it will be available in Q4 2024!
Join the waitlist here to stay informed with the latest and access TradrLab.
Stay tuned for more trading content!