“Well, the good backtest result is to return 1,000,000%.”
That’s what many new traders think about, and that’s why over 90% of traders fail.
If you want to be a successful trader, you need to properly assess your trading strategy and adjust your perceptions of how you are doing well backtesting.
Spoiler Alerts: Most successful trading strategies start as mediocre or poor.
But through continuous testing and iteration, they are It is made in A profitable strategy.
Just as successful traders are created, not born… a successful strategy requires an investment of time and effort.
Where to start
The first thing to understand about backtesting is that almost all successful trading strategies didn’t begin like that.
A good trading strategy is like a great invention.
It starts with an idea and the inventor wants to solve the problem.
Traders want to solve the problem of making money consistently in the market.
Perhaps you need to refine your trading strategy ideas to increase profitability.
Once you realize that trading strategies rarely start as profitable, it makes sense that Breakeven backtests and slightly profitable results can actually be good.
If your strategy is break-even (or nearer), you may need to make some adjustments to be profitable.
In many cases, trying money management or exits can make your strategy more profitable.
With that in mind, here are more details on what to look for in the test results.
Historical data used in backtests
Before analyzing actual backtest results, one important thing to consider is how much historical data was used in the backtest.
Many backtest platforms only provide 1 or 2 year backtest data.
This is not enough to understand how strategies work across different market conditions and cycles.
So, if you’re backtesting, get as much historical data as possible.
Define review period
If you have a lot of historical data to test, make sure to define a review period for your strategy.
If you are creating strategies on your daily charts, we recommend checking your returns every year.
If you’re testing on an hourly chart, you probably need to check out the monthly results.
Next, we will understand the average return for each review period.
Perhaps you won’t make a profit during every review period, but you’d like to see what kind of drawdowns you have to endure and what you’ll expect from your trading strategy.
This analysis allows you to compare trading strategies in an objective way, and determine which strategies you want to pursue and which ones to drop.
Set goals
Now it’s time to understand what’s important you.
A “good” trading strategy must be good for you, and there’s no one else.
It is not necessarily the most profitable, but not the most consistent.
But if it meets your income needs, that’s what matters.
Words of caution here…
Many traders (including myself) start with unrealistic goals in their strategy.
So you set goals but you may find yourself need to adjust what you’re expecting 1 Trading strategy.
You may need to trade several trading strategies or markets to get the results you are looking for.
But if you keep working, the results will come.
How to identify potential trading strategies
There are three basic types of backtest results:
- terrible
- break even
- Profitability
Here we define each one and show what to look for in each one.
Awful backtest results
This is obvious.
If your strategy loses more than 80% of your account, you probably shouldn’t spend more time.
The above strategy lost 99.82% between 2009 and 2024.
That’s as bad as it gets.
Trying to optimize your strategy with terrible results is like polishing Titanic brass.
It’s best to go ahead and use the power of your time and brain to create new strategies.
Break-even backtest results
This is where things get exciting.
Most new traders are reading this article, so it’s not you.
Break-even strategies can be potentially optimized and much more profitable.
You may need to tweak or two to work well.
There are a few questions to ask when trying to improve your strategy.
- Can you easily eliminate the biggest loser?
- Do you have any common characteristics of losing a transaction? Maybe they’ll go longer than two days or take you to a certain time of year.
- What happens when you set a larger profit target?
- Can you do it? increase Do you not stop so often, as you risk your suspension loss, the same percentage of your account?
- Will Trailing Stop Loss improve your results?
- How will your outcome change your outcome, or will it increase the risk per trade? It may be counterintuitive, but lowering the risk per trade can increase your total revenue.
These are key things to consider when trying to improve the performance of your strategy.
But don’t stop there, what else can you think?
Profitable backtest results
Now we reach the results that everyone is looking for. The first attempt is beneficial.
It doesn’t happen frequently, but it is possible.
I only had very profitable results on my first attempt… twice.
But even if your results are profitable, you can’t stop there.
You need to reconfirm the results.
Real-world transactions can be dramatically different from the outcome if they don’t explain everything.
Consider the following:
- Did you properly explain the fees, spreads, slips, and fees?
- Wake up to get a deal when they set up?
- Have you followed the transaction plan?
- Have you run a Monte Carlo simulation to see the biggest potential drawdown?
Congratulations, if you make sure your results are good, you have a profitable trading strategy now.
Now it’s time to move on to advanced testing to make sure it works.
This is the important step absolutely Make sure your strategy works before putting full trading capital at risk.
But don’t stop there.
Continue to test ways to potentially improve your strategy.
Check if you can increase your return or reduce your drawdown.
Choose what’s more important to you.
To diversify your risk, consider trading two or three versions of the strategy at the same time.
Once you’ve traded strategies on a full-size account, you can repeat the process and find another profitable strategy.
Final Thoughts
Again, you probably won’t get a very profitable backtest result on your first attempt.
The key is that you can find diamonds in the rough.
From there, you can work on developing each strategy.
It’s also important to know which strategies aren’t working and stop trying to improve them right away.
Remember, trading strategies usually tend to get a little worse in real life.
So, explain it and don’t get too excited about the big returns.
Before I go, I’ll leave you with the conversation we had about this topic on Think Profit Podcast.
It gives you more ideas about what to look for when backtesting.
https://www.youtube.com/watch? v = zuhqwxihfio
