It has become an everyday word……backtesting. You can hardly avoid seeing it, because so many marketing efforts are convincing traders during this choppy market that backtesting is the magic bullet for successful trading. I’m not so sure I agree.
Maybe a PC tells you that a given trading system would have made or lost X dollars over the past 6 months. So what? Isn’t the market always in motion, always changing? If it is so easy to just figure out what worked over the past month and apply it toward the coming month, then wouldn’t the market be showing us some phenomenal trends right now with everyone pushing stocks in the same direction rather than the back-and-forth choppy action we see so much of?
Instead, we’re getting a LOT of program trading that keeps things choppy as dips are bought and rallies are sold. With the trendless market, it has truly become a market of stocks. Good swing trading right now is about doing your homework to locate good technical patterns and then keeping your risk/reward in check.
Don’t let glossy advertising from software vendors fool you into thinking that your trading strategy just isn’t complicated enough. Remember Gartman’s rule and the simplicity it offers. Keep tabs on the market environment and adjust your trading plan accordingly. If a good trend exists, then look for some continuation setups like flag patterns and triangle patterns. If prices are stuck in a range, then consider some reversal setups like the double top or trade a channeling stock. Your ability to adapt to existing conditions is what will add to your P&L, not your ability to backtest effectively.
Successful trading is about recognizing what kind of market you’re in and how to trade it most effectively, even if it means that you stand aside at times. Hoping that you could spend the next long weekend backtesting a magic formula based on past conditions may just be a shortcut that will only leave you more frustrated.
President, The Stock Bandit, Inc.