Six things I wish I knew when I started trading: Part Six – Backtesting and Optimization

Robert Pardo Book

This was actually a relatively new skill for me.  I began working with a programmer last year to get my system into a back testing software so that I could look to improve its efficiency and performance.

I spent the entire summer and part of the fall, stripping down the components of the system, reading books on testing strategies and analyzing some of the pit falls that that can lead to, learning how to optimise a system without the mistake of over optimisation or over fitting parameters to match the results I wanted on a particular set of data.  This is a common mistake in system development and unfortunately is prevalent in a lot of trading systems that are for sale by unscrupulous vendors on the net.

For years, I used to do all my testing in excel, it was a laborious and time consuming task.  To test a stock and get the right parameters for my indicators it would take me a day to do one stock, sometimes more.  Now I can do the same test in less than 10 minutes.

Another thing, I thought I really had a handle on how to test trading systems till I read Robert Pardo’s book:  The Evaluation and Optimisation of Trading Strategies.  I soon realised that his methods and scientific approach were simply better and more robust than mine.  (I have to warn you though…it’s a pretty dry read!)

Thanks to Robert Pardo and my development team, I can now literally choose a stock, test the strategy over a period of years, find the optimal parameters for those years and then begin a new year with a defined set of instructions for the stock to garner profits.  Using risk management and leverage produces fantastic results. What was a very good system got WAY better!

So I highly recommend for anyone interested in designing their own system or testing someone else’s to get up to speed with a back testing software package, I use Ninja trader, it is free and does an excellent job, unfortunately to take full advantage you will need to be able to understand and write C++ coding.  But it also has lots of indicators already built in to try out.  This was definitely one of the things that I wish I knew about when I started trading!

So, look out 2013, this system is going to rock!

May today be a profitable day for all of us!


P.S. I am working diligently to make this system available to all via a download in 2013, particularly for those of you that want to do this on your own and test your own stock choices.  I am also excited about this, as from a psychology of trading standpoint, to understand the system and PROVE that it works to yourself will make it easier for you to follow.  That is my goal for 2013.