After you have found a profitable trading strategy that you already back-tested, how can you be sure that this strategywill produce the same gains in future? Below some guidelines.
Nobody can predict the future, your strategycan easily make losses in next years or can be no tradable.
There are some tests you must do before accepting a trading strategy, these tests swill show the robustness of your strategyand when passing these tests, it will be more likely to show gain in future.
Test 1 : Make sure that you put liquidity rule, that your entry and exit prices are realizable.
Test 2: Examine again your trading strategy and your rules (This is very important). Dozen of trading strategies and systems can show great results but after more examination, they appear that cannot be followed in real life. Check if there is one stock that made very big gain, the strategy will maybe become no profitable without this stock.
Test 3: Change twice or 3 times the date of begin for the simulation, if it still show good results then it has passed the test 3.
Test 4: Change values of some parameters or variables you have in your trading strategy rules, you must change one value and then back-test, change another and then back-test. If the results are not affected very badly then it passed the test 4.
Test 5: Try to restrict the strategy from buying 20% or more of stocks you previously bought when doing the back-test. Then re-run the back-test. To pass this test, strategy must show pretty the same results as before.
Test 6: Equity chart must have a good look, check some statistic values like sharpe ratio, standard deviation, maximum drawdown, average day for gains recovery. It depends on the risk you are willing to take but choose only strategy that have: higher sharpe ratio, higher sortino ratio, lower standard deviation, lower maximum drawdown.
Exclude strategy that have very big max drawdown, standard deviation and average day for gains recovery.
The most important factor i think is average day for gains recovery.
Its the average number of day that you must wait until your equity value will goes back to the same level before the drawdown happen.
Big values will let you wait for long times before recovering gains and for sure many traders will abandon their trading strategy, and that’s the worse thing that can happen to a trader because just after that, the strategy will show excellent results. (That’s always happen)
Theses tests are very restrictive and you will reject maybe all your trading strategy, but when trading you will put your money, real money, so i think you must be very selective to make all chance in your side.
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