Insights from Two Years of Backtesting Trading Strategies
Over the past two years, I have immersed myself in the intricate world of trading strategy backtesting. My journey began as a personal project to develop tools on TradingView for a friend looking to analyze his own trading approach. This led to a broader exploration of various strategies, driven by curiosity and collaborative experimentation. While backtesting may seem straightforward—running a strategy against historical data to evaluate its performance—the insights I’ve gained have been nothing short of transformative.
Initially, I crafted my own coding scripts on TradingView, eager to dive deeper into the mechanics of different trading strategies. Together with my friend, we dedicated countless hours to backtesting, testing out numerous strategies that were frequently touted on platforms like YouTube. The method was simple: set up a chart, apply the script, hit start, and analyze the results. We diligently compiled our findings into an ever-growing Excel file, which eventually became overwhelming. Yet, as I examined the performance of multiple strategies, a stark realization emerged: most did not demonstrate consistent profitability over the long haul.
While certain strategies may yield impressive results over short timeframes—months or even a year—widening the lens to assess longer periods often reveals underwhelming performance, characterized by more losses than wins. The unpredictability of market volatility can significantly impact outcomes, exposing the fallacy of chasing short-term gains.
Many tutorials and videos showcasing strategies tested hundreds or thousands of times can be misleading. It’s disheartening to acknowledge, but a strategy that appears to generate 250% profits in one year might falter dramatically the next, leading to severe financial setbacks.
Throughout my research, I discovered a critical insight: without exceptional circumstances, the majority of strategies struggle to outperform the market. The “sweet spot” for sustainable investment I identified lies within a 20-30% annual return range. This is the territory where one can achieve substantial gains without assuming excessive risk that could result in devastating losses during downturns. The only tactics that produced consistent success fell within this profit bandwidth, especially after accounting for commissions, spreads, and various fees.
It’s easy for traders to become enamored by the allure of chasing 100%-plus annual returns. However, this pursuit often leads to catastrophic consequences, including significant drawdowns or complete account wipeouts when market conditions fluctuate.
So what’s the key takeaway from my extensive backtesting experience? Consistency triumphs over the allure of flashy returns. A robust strategy yielding 20-30
One response
Your experience with backtesting is both insightful and poignant for anyone involved in trading, and it highlights a critical understanding of what true success in the markets often entails. Here are some additional thoughts that may help enhance your approach or clarify some of the themes you’ve touched on:
Understanding Market Conditions
One important aspect of backtesting that sometimes gets overlooked is how market conditions can significantly influence the performance of any trading strategy. Markets are not static; they evolve due to economic indicators, geopolitical events, changes in market liquidity, and investor sentiment. A strategy that performs well during a trending market may struggle during a range-bound or choppy market. Therefore, it’s crucial not only to analyze how your strategies performed in historical data but also to segment that data by different market conditions. This way, you can gauge how resilient your strategies may be under various circumstances.
Risk Management as a Priority
You rightly mentioned drawdowns and the importance of sustainable returns. It’s also essential to emphasize that robust risk management can safeguard your trading capital during adverse periods. Implementing measures such as setting stop-loss orders, position sizing based on volatility, and diversifying your portfolio could enhance your trading strategies. Consider adopting a risk/reward ratio of at least 1:2, which means for every dollar risked, you aim to win at least two.
Embracing a ‘Strategy-Agnostic’ Mindset
While it’s useful to focus on technical analysis strategies, it’s worthwhile to cultivate a strategy-agnostic mindset. Explore other types of trading methodologies such as fundamental analysis, sentiment analysis, or quantitative approaches. The interplay of different strategies can provide a well-rounded view of the market and potentially yield unique opportunities.
Continuous Learning and Adaptability
Your journey into backtesting is a useful reminder of the need for continuous education in trading. Market dynamics shift, and staying updated on economic trends, regulatory changes, and technological advancements can add depth to your trading perspective. Beyond backtesting, consider engaging in communities or clubs where traders discuss newer strategies or share insights about market predictions.
A Focus on Long-Term Mindset
Investing in the stock market should be approached with a long-term mindset. Short-term volatility can be unnerving, but if you maintain a focus on long-term goals based on your backtested strategies—whether that be for consistent income or wealth accumulation—you may find it easier to weather short-term fluctuations. Have a clear plan in place for when to adjust your strategy, as well as when to stick