BACK TESTING:
Some traders find it helpful other do not.
Back-testing is, imho, the most critical part of trading
Back-testing the proper way, although arduous, provides incredibly valuable data. It is the Ditch digging of trading but well worth it.
I have come to embrace back testing and reviewing my trades religiously and in this day and age of automation, I have found it best, for me at least, to go back to 2am est (when I start trading and scroll forward bar by bar looking for my set-ups, my entries and my exits. In fact, I spend more time reviewing and planing my trades than I actually spend trading. While this method is not for everybody and it is time consuming, I firmly believe it is well worth it for the following reasons:
First and foremost, it builds confidence in your trading methodology. Seeing how your trades set-up, execute and finish while observing what the market does will allow you to stay in a trade when it is either taking heat or going your way because you will have "seen" it before.
Second, it will allow you to build a statistical base for your trades. For me the 2 most important pieces of data that I look for are 1) DD (drawdown) and 2) PP (Pip Potential). This has allowed me to determine how much of a stop I usually need (point of no return for a trade) and how far the trade will run.
DD, the Draw down, I find this information most useful as my position size is based on my stoploss. For example, I risk 2% of my capital per trade, so if my stoploss is 10 pips I can use a position size 10 times larger than if my stop was 100 pips. Obviously, the bigger position size the more bang for my Pips I am getting.
I hope this helps and please feel free to comment and ask questions,
I will continue this topic in my next post.
Allen
Some traders find it helpful other do not.
Back-testing is, imho, the most critical part of trading
Back-testing the proper way, although arduous, provides incredibly valuable data. It is the Ditch digging of trading but well worth it.
I have come to embrace back testing and reviewing my trades religiously and in this day and age of automation, I have found it best, for me at least, to go back to 2am est (when I start trading and scroll forward bar by bar looking for my set-ups, my entries and my exits. In fact, I spend more time reviewing and planing my trades than I actually spend trading. While this method is not for everybody and it is time consuming, I firmly believe it is well worth it for the following reasons:
First and foremost, it builds confidence in your trading methodology. Seeing how your trades set-up, execute and finish while observing what the market does will allow you to stay in a trade when it is either taking heat or going your way because you will have "seen" it before.
Second, it will allow you to build a statistical base for your trades. For me the 2 most important pieces of data that I look for are 1) DD (drawdown) and 2) PP (Pip Potential). This has allowed me to determine how much of a stop I usually need (point of no return for a trade) and how far the trade will run.
DD, the Draw down, I find this information most useful as my position size is based on my stoploss. For example, I risk 2% of my capital per trade, so if my stoploss is 10 pips I can use a position size 10 times larger than if my stop was 100 pips. Obviously, the bigger position size the more bang for my Pips I am getting.
I hope this helps and please feel free to comment and ask questions,
I will continue this topic in my next post.
Allen