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Hello, and welcome to the Indicator Warehouse.
This is Ray Burke with Ray's Reality Room here.
And I am going to be covering a do's and
don'ts of back testing.
What I have found is that, after talking with so many
traders and actually doing a lot of these mistakes
myself early on--
I have found that there are some real key ingredients to
making a back testing disaster.
I'm going to have to say that the first thing that I notice
with most traders is that they don't bother to
document their results.
They have no idea really where they've been, because what
they tend to do is they just take this crosshair--
and I'm using DTS as a backdrop
here, for an example--
and what they'll do is they'll use their crosshair.
So right here we've got the Eagle Trend Trader.
And we have a short signal that sets up right here at
this hash mark.
And what they'll do is they'll put their crosshair on.
And they'll say, OK, well I've entered here, and it maybe
goes to here, and I get out here, and maybe
mine stops up here.
And they'll do the same thing with this signal, this signal,
this signal.
And really they don't have any solid idea of what they're
really looking for.
Now, we also need to keep in mind that any of the results
that most traders-- and I've been guilty of
this myself as well--
they don't document their back testing.
Now the other thing with manually back testing is this.
When you manually back test a system,
it's very time consuming.
I mean, you've got to go through each and every signal
in order to get an accurate back test.
And the problem is, if you're not documenting your results,
how do you really know how well the back test even did?
So if you don't have an accurate back test result, how
in the world can you expect to get positive results in a
forward test?
And, by the way, I'm hoping it's a forward test in a
simulated environment.
Over the next couple of minutes, what I would like to
do is I would like to show you a more accurate, an easier,
more time-effective way to actually back test either your
own strategy, a system strategy, whatever strategy
you want to back test.
And it takes so much of the effort out of it.
Not to mention, it's going to give you an accurate result.
All right, what I've done here is I've loaded Profit Finder.
And the way I have this set up is, I actually have it set up
literally to take every signal that comes down the pike over
the last 10 days.
And today I have June 15 of 2012.
So right now, the next thing that I'm going to do is, just
right out of the box, I'm going to go ahead and I'm
going to click Performance.
And there I have it.
I'm $3,555 profitable.
That's taking every single signal that is coming out of
the gate with the Eagle Trend Trader.
OK, now you see that we're profitable, per
se, with this situation.
And the big question is, well jeez, Ray,
how did you get there?
As I stated, these are just the standard settings right
out of the box that I used with Profit Finder.
The only thing that I've changed is, I've set my
session to begin at 7:00 AM Mountain Standard Time, end at
9:30 Mountain Standard Time, and then begin my second
session at noon Mountain Standard Time and end at 13:45
Mountain Standard Time.
Now as you saw, we were $3,500 and change profitable, taking
every signal that comes down the pike.
The next big question is, well jeez, can we do a little bit
better than that?
Let's go ahead and see.
OK, the first thing we can do is we can actually use a
trailing stop.
Now I'm not going to go and get into the stops right now.
But as you can see, we have Parabolic SAR, SuperTrend,
ATR, as well as [? FixTicks ?]
available to us.
Just to keep this video nice and simple, I'm just going to
go ahead and I'm going to leave it set at none.
All right, the next thing that I've done is I've added a
target exit plan.
I'm going to go ahead and I'm going to use three contracts.
We're going to take one off at 10 ticks.
Let's take number two off at 20 ticks.
And why not take number three off at 30 ticks?
Now, let's go ahead and make things interesting even more.
As you can see, there is a break even stop.
And there's a break even trigger distance.
Why don't we go ahead, and let's take this.
And let's make our break even trigger distance 15 ticks just
to see how it turns out.
Now we're going to click Apply.
OK, so we've made our changes.
We've picked some profit targets.
And we're actually going to go to break even after we've
reached a certain profit target.
Now let's see if it made any difference.
Now rather than have go back through the entire chart again
and go through all of it, all I did as you saw was I right
clicked, I clicked indicators, went to Profit Finder, and I
just changed my parameters right here in my window.
Really easy to do.
Now again, I am taking the trades programmatically.
I am taking every trade that comes down the pike.
I am not cherry picking here.
So we're going to go ahead, click Apply again, click OK.
Now let's calculate the performance and see if we do
any better.
Remember, we did $3,555 on our last back test.
So let's see how we do.
Click it.
And that quick--
well, it looks like we did a little bit better here.
We did $3,902.50 on all those trades.
So we actually did a little bit better on that one there.
Now the next question is, well that's great Ray--
I can see all this documentation up here, but is
there any way that I can save what I did, say, to a
spreadsheet?
Well, I'll tell you what.
Say no more.
All we've got to do is reach down here, and we want to
click right to CSV.
So the next thing that we're going to do is we're going to
go to Computer.
We're going to go to the C-drive.
We're going to go to Users, Trader, My Documents.
And then right in here we are going to find our Trade
Records CSV.
Go ahead and double click, and you'll see that it brings us
our spreadsheet.
It's going to tell us our overall net profit, gross--
I mean, all the way down the line.
It's going to give us our total number of trades.
It's going to give us the percentage profitable.
And in this case, we didn't do too bad--
$3,900 and we're only 44% overall.
And that was with the Eagle Trend Trader.
It gives us our average winning trade, gives us our
average losing trade.
All this information is already documented for us.
And really all we've got to do at this point is save the
document to a folder, and we can go over
it at a later time.
We can compare it with other results--
whatever we want to do.
Well, I'm sure you can see the value in proper back testing.
Like I said, it's one thing to go over a chart with your
crosshair and try to commit this to memory.
It's an entirely different ball game when we actually use
a tool that actually documents, allows us to change
parameters, and just overall make our back testing a lot
easier than the standard handwriting down information
and/or going back and forth.
You are going to see all of your results printed out here
on the chart where you can actually see them on the
chart, rather than once again running willy-nilly with the
crosshair back and forth the chart.
I hope you found this video to be informative, and I hope you
found it to be helpful.
Thanks for listening and watching.
And if you have any questions whatsoever, please feel free
to contact me at Ray@realityfuturestrading.com.
Thanks, and have a great day.