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Something we looked at quite some time ago, Advanced systems testing is an area which always proves valuable to re-visit.
In this article we will look at a method of back testing and some important components to be considered in developing a trading method.
Back testing is a vital part of proving any trading system and one that should be done regularly in order to adapt trading styles to the current market conditions. As market conditions change, a trader may wish to move from a momentum trading style like a moving average system to an oscillating style based around relative strength indicators, for example. Whatever the case may be, the system needs to be tested to identify the prevailing market and decide which method will realise the most capital before real money is put into the market.
Fortunately, there are many different ways of running back tests and system validation through your HUBB software. This particular method of back test is demonstrated here using Integrated Investor as the primary trade selection device. To have a quick look at the philosophies behind Integrated Investor and to understand how integrated analysis works, just follow this link: Integrated Investor
The back testing process is simple enough; just select the “Open Precomputed Scans” from the drop down list in the “Scanners” tab (note that the same can be done for HUBB Investor and ProfitSource but with far fewer options).
Let’s look at a chart:
click to enlarge
Once you have done this, you can intersect the different Precomputed Scans you wish to test as part of your system.
Of course, the system you want to test should be one that is based upon a logical sequence with parameters that are ‘congruent’ with one other. There would be no point looking for trades that are offering bullish and bearish signals, for example, as one will naturally cancel out the other. Equally, a mistake that is prevalent with many novice traders comes from trying to build systems around indicators that are co-linear. Simply put, this means that looking at a moving average cross over combined with a MACD (moving average convergence divergence), for example, does nothing more than look at two lagging indicators calculated from the share’s price. As such they are going to often give similar results – the price goes up and a little while later the moving averages cross and the MACD gives a bullish signal.
It would make far more sense to observe the problem of share selection from different perspectives. A slightly more sophisticated trader might use share price indicators (such as moving averages) in combination with volume indicators (such as on balance volume). By increasing the number of different perspectives, there can be an increase in the level of success as multiple views uncover any previously hidden reasons not to take a position. Sophisticated traders may go even further to look at the options market and/or the fundamentals of a share in order to make high quality trading decisions.
We have only scratched the surface of the possibilities of integrated analysis. The choice of combinations within Integrated Investor are extremely extensive and taught in more detail during our MasterKey course. Take advantage of today’s markets using a multi-dimensional approach to your trading.
Stay Sharp,
John Jeffery
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