Indicator Trading Probability (IMPORTANT) – Why I Back Test Trading Strategies ONLY 100 Times?
I have tested many different strategies on the Trading Rush Channel, right? Occasionally, someone will ask, Why I only Back test A strategy 100 times, and not 10000 times. They say Testing a strategy only 100 times, won’t show the Win Rate Accurately. Yes, that is true. But we don’t have to test a strategy 10000 times to see if it is a profitable strategy or not. We can do it by testing it only 100 times. And I’m going to prove it, how you can back test a strategy 100 times and start making money.
Remember the Back Tester Feature in the Official Trading Rush App? Well, I have Modified it just for this video. I’m going to use it to prove a point.
In my videos, Once I’m done testing an indicator 100 times, I always say, the win rate of this strategy is approximately this and that. I heavily use the word approximately whenever i talk about the win rate.
That’s because, when testing an indicator strategy 100 times, I’m not trying to show the accurate win rate. I’m trying to be close enough to the actual win rate of a strategy. That’s All we need, to see If that strategy can make money or not.
Let me give you an example.
Lets say, an indicator works 70 percent of the time. In other words, an indicator has a win rate of 70 percent. But we don’t know that yet. If we wanted to know that number accurately, we would have to test that indicator at least 10000 or more times.
But anyone who has been trading for a while, can tell, that testing an indicator strategy 10000 times is a very difficult task to do. It is very time consuming even if you automate the entire back testing process. because it will take more time to learn how to automate the back testing process, and how to code in the first place. It can take days to learn how to code, if you have no background in coding. It only takes 1 hour to back test a strategy 100 times manually. And You can easily find if the strategy works or not by back testing it 100 times.
But why do we want to know the win rate of a trading strategy so accurately? You don’t need to know the probability of an indicator that accurately to make money in trading. All you need to do, is find the approximate Win rate of a strategy. And you can do this by simply testing a strategy 100 times.
It will take these 100 random trades 10000 times. Once it is done taking 100 trades 10000 times, we will see how close we are to the accurate win rate when we back test a strategy 100 times. In other words, we will see what is the probability of being close to the accurate win rate of a trading strategy, if we only Back Test it 100 times.
That’s all. Now you know why I back test strategies only 100 times. There is a high chance that the win rate i will find by testing 100 times, will be very close to the accurate win rate of a strategy. All we need is to find if the strategy is profitable or not. If we find the win rate to be 70 percent after back testing, There is high chance that we are only off by approximately 5 percent above or below the accurate win rate. In other words, there is a very high chance that the strategy is a profitable trading strategy. It takes around 1 hour to back test a strategy 100 times. If we find the profitability of a strategy by testing it 100 times, why waste time by testing it 1000 or 10000 times. What are you going to do by finding the accurate win rate of a strategy, when most of the success in trading is based on psychology of the trader.
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FAQs
When you are backtesting a day trading strategy (15-minute timeframe or lower), it is usually enough to go back two to three months and start your backtest there. When you are backtesting a strategy on a higher timeframe, you will have to go back 6 to 12 months.
Is 100 trades enough for a backtest? ›
If you're backtesting a day trading strategy, 100 trades is not nearly enough to see if a strategy is reliable. Let's say that you're backtesting a day trading strategy that averages 1 trade per day. There are about 20 trading days per month. So if you have 20 trades per month, 100 trades will only represent 5 months.
Why does backtesting not work? ›
Backtesting relies on historical data, which may not capture changes in market conditions, such as shifts in volatility, liquidity, or regulatory environments. Strategies that perform well in one market environment may not work as effectively in another, leading to poor performance in live trading.
What are the limitations of back testing? ›
The Limitations of Backtesting Trading Strategies
Just because a strategy performed well in the past using historical data doesn't guarantee it will translate to success in the future. Market conditions, investor sentiment, and regulations can change drastically, rendering past performance irrelevant.
Can you backtest too much? ›
Back testing can be decent or completely misleading depending on the time frame and strategy you're trading. The further you go back in the time the more garbage the data becomes. There is also a chance you fine tune your strategy so much that it'll only work on last data.
What is the 6 rule in trading? ›
Rule 6: Risk Only What You Can Afford to Lose
Traders must never allow themselves to think they are simply borrowing money from these other important obligations. Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.
Is there a 100% trading strategy? ›
A 100 percent trading strategy is an approach that involves investing all of your capital into a single trade. While this can be risky, it can also lead to significant profits if executed correctly.
How many traders are consistently profitable? ›
Conclusion: Approximately 1–20% of day traders actually profit from their endeavors.
How much do I need to make 100 a day trading? ›
You're really probably going to need closer to 4,000 or $5,000 in order to make that $100 a day consistently. And ultimately it's going to be a couple of trades a week where you total $500 a week, so it's going to take a little bit more work. Want to learn more about trading?
Is TradingView good for backtesting? ›
In summary, TradingView provides powerful tools for both manual and automated backtesting. However, remember that backtesting is just one part of strategy development. Past performance doesn't guarantee future results, so always trade with caution and proper risk management.
Here's an example of one of the methods:
- Navigate to the indicators and trading systems window.
- Select the trading system you want to backtest.
- Open the trading system and input your test parameters.
- Run your test and analyse the results.
- Optimise by testing different input parameters (eg stop-loss values and limit orders)
AlgoTest - Free Backtesting Options Trading Strategies in India.
How long should I back test? ›
I Personally do back test for 6 months to 1 year. some strategies will not be favourable when you go beyond 1 year+. Atleast 6 months is mandate for a good strategy, If a strategy gets max number of profitable trades in last 6 months thats enough.
How important is back testing? ›
Backtesting is an essential part of trading that allows traders to evaluate their strategies without risking capital, thereby assessing potential profitability and associated risks.
What are examples of back testing? ›
Example of Backtesting
An investor uses a 50-day moving average as a trading strategy for a stock, and starts to collect price data going back to 2018 as a way to determine whether the stock can match similar returns in the future.
What is the 6% rule for pattern day traders? ›
Who Is a Pattern Day Trader? According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
What is the rule of 2 in trading? ›
One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.
How long should I test a strategy? ›
For strategies with an average holding period from 1 day to 30 days, 2 to 3 years is a pretty good rule of thumb. You should follow that up with 3 to 6 months of paper trading. Longer holding periods, more backtesting time.
How often should I check my trades? ›
Checking your brokerage account enables you to make sure your portfolio is balanced. You don't want to check your account too often or you risk making bad decisions based on fear. You should check around every six months to a year to make sure you have the right asset allocation.
