Backtesting TA Strategies - Discretionary Trading and The Wyckoff Way

[suby 10]

I have checked through the forums in attempts to learn a bit more on backtesting and I can't deem what is on here as valid.

 

I realize that this should probably be posted in automated trading but as a discretionary trader who uses Technical Analysis I figured this would be the best spot.

 

I was wondering if other discretionary traders on here who follow Technical Analysis backtest...

 

If so, what do you often test for?

 

Specifically in regards to trading with the Price to Volume relationship and the teachings of Wyckoff

 

Suby

[BlueHorseshoe 10]

I have checked through the forums in attempts to learn a bit more on backtesting and I can't deem what is on here as valid.

 

I realize that this should probably be posted in automated trading but as a discretionary trader who uses Technical Analysis I figured this would be the best spot.

 

I was wondering if other discretionary traders on here who follow Technical Analysis backtest...

 

If so, what do you often test for?

 

Specifically in regards to trading with the Price to Volume relationship and the teachings of Wyckoff

 

Suby

 

Backtesting allows you to test a specific hypothesis on an historical data set that may hopefully be representative of future market behaviour.

 

Before you can arrive at a specific hypothesis you need to derive more general tendencies from the data.

 

"I can profitably fade any price cross of a 4 period SMA back in the direction of the slope of a 200 period EMA when the ADX is below 30" . . . Is an example of a specific hypothesis that one could backtest.

 

"I can profitably fade small countertrend movements back in the direction of a longer term trend when the market is showing a lack of trending capability in the intermediate term" . . . Is an example of a conjugation of more generalised tendencies which, if generally held to be true, might inspire a specific hypothesis such as the one above.

 

So the first thing that I would do is to mine the available data to try and establish some general tendencies that you can build upon. Once you have these you can begin to select more specific tools (such as indicators) to exploit these tendencies within a back-testable strategy.

 

Most back-testing software will allow you to carry out a data-mining styled exercise.

 

Here is an example of the sort of thing you might like to know:

 

Do most short term highs occur on higher or lower volume?

 

The trick here is that you'll need to test across a variety of definitions of short term high. These might range from a three day high to a twenty day high. You might find that 100% of all 17 day highs in your test occur with volume that is higher than the previous period. Unfortunately this isn't much help - what you need to know is whether short term highs in general occur on higher volume than the previous period. For all your tests, then, you might average out the percentage of short term highs that occur on higher volume. If this percentage comes out at, say, 78%, then you might conclude (assuming that your data set is large enough and sufficiently representative) that this general tendency will hold to a reasonable degree regardless of the specific periodicity reference used for the high within the strategy you subsequently devise.

 

Hope that helps - anything I was unclear about then just ask!

 

BlueHorseshoe

[suby 10]

Backtesting allows you to test a specific hypothesis on an historical data set that may hopefully be representative of future market behaviour.

 

Before you can arrive at a specific hypothesis you need to derive more general tendencies from the data.

 

"I can profitably fade any price cross of a 4 period SMA back in the direction of the slope of a 200 period EMA when the ADX is below 30" . . . Is an example of a specific hypothesis that one could backtest.

 

"I can profitably fade small countertrend movements back in the direction of a longer term trend when the market is showing a lack of trending capability in the intermediate term" . . . Is an example of a conjugation of more generalised tendencies which, if generally held to be true, might inspire a specific hypothesis such as the one above.

 

So the first thing that I would do is to mine the available data to try and establish some general tendencies that you can build upon. Once you have these you can begin to select more specific tools (such as indicators) to exploit these tendencies within a back-testable strategy.

 

Most back-testing software will allow you to carry out a data-mining styled exercise.

 

Here is an example of the sort of thing you might like to know:

 

Do most short term highs occur on higher or lower volume?

 

The trick here is that you'll need to test across a variety of definitions of short term high. These might range from a three day high to a twenty day high. You might find that 100% of all 17 day highs in your test occur with volume that is higher than the previous period. Unfortunately this isn't much help - what you need to know is whether short term highs in general occur on higher volume than the previous period. For all your tests, then, you might average out the percentage of short term highs that occur on higher volume. If this percentage comes out at, say, 78%, then you might conclude (assuming that your data set is large enough and sufficiently representative) that this general tendency will hold to a reasonable degree regardless of the specific periodicity reference used for the high within the strategy you subsequently devise.

 

Hope that helps - anything I was unclear about then just ask!

 

BlueHorseshoe

 

First time behind the computer this weekend, but thank you for the detailed reply BlueHorseshoe!

 

I can't think of anything too indepth at this point of time just two questions for you

 

1) How/what do you use to backtest? What is your Opinion on Trading Blox?

 

2) Where do you obtain your data from?

[BlueHorseshoe 10]

First time behind the computer this weekend, but thank you for the detailed reply BlueHorseshoe!

 

I can't think of anything too indepth at this point of time just two questions for you

 

1) How/what do you use to backtest? What is your Opinion on Trading Blox?

 

2) Where do you obtain your data from?

 

Hi Suby,

 

Glad my reply was helpful - if it only gets you thinking then that's a great start because like pretty much anything in trading, backtesting can be both a massive help and a huge hindrance.

 

Nowadays I do everything in TradeStation, and this is also where my data comes from. I think TradeStation is absolutely fantastic, but I have very limited experience with other platforms, so that's by no means an objective recommendation. I think that it might be worth posting this as a seperate thread question and seeing what response you get.

 

I have never used TradingBlox, but it certainly used to be very highly regarded, as it offered portfolio analysis capabilities before most other retail platforms (TradingRecipes was another MSDOS pioneer in this area). I know nothing about the costs associated with TradingBlox, or the extent of your requirements, but you may possibly get all that you actually need for free from elsewhere, especially if you have no need of portfolio analysis.

 

As a recommendation of a platform that I do have substantial backtesting experience with, is completely streamed (no download or software install), offers great end of day charting for free, and allows you to sign up for a free trial of intraday data, try http://www.prorealtime.com. It doesn't seem well known in the US, but I think it's pretty damn good as far as free stuff goes.

 

Overall though, I'd recommend you ask around - I just stumbled upon something I liked and stuck with it, so can't really offer an objective viewpoint.

 

Pretty much the classic guide for backtesting and optimisation, I think, is Thomas Stridsman's 'Trading Strategies that Work' - this gives a pretty balanced view of exactly what you can and can't expect to achieve with backtests.

 

Regards,

 

BlueHorseshoe