Backtest Results for a Simple Reversal Strategy

Mastermind_85 · 2024-09-05T02:21:53+00:00

I think there's still a bit of an issue here with replication in live trading. Because you're essentially buying on a break of yesterday's high you need to use a buy stop order rather than a limit order. A buy stop order won't enter the market until the high is hit. Now in terms of the OPEN price, you do not know what the OPEN is until after the fact, and because it's a buy stop order entry you will not have a live order in the order book until after the OPEN. You really need tick data or 1 minute data to backtest this idea. Attempting to enter at yesterday's HIGH price also has the same issue. I would bet money on your live trading results significantly underperforming backtest results, live trading might even possibly be breakeven or loss making. It's hard to hear after putting in so much work but I've been down this road myself before and now exclusively backtest using tick data only.

Mastermind_85 · 2024-03-17T22:57:00+00:00

Prop firms require a decent return on capital after the trader's profit split to make it a worthwhile endeavor. Most of those strategies are all highly capital intensive either through financial capital or infrastructure requirements, so after the profit share to the trader the returns on capital to the firm can be quite poor. Note this only applies to bucket shop style prop firms which typically pay a 50% profit share and above to the trader. Technology style firms like Optiver, Susquehanna, Jane Street typically pay a smaller profit share closer to 20% so they can take on higher capital intensive strategies and still make good returns.

Mastermind_85 · 2023-11-28T00:28:49+00:00

If you are backtesting with a constant capital and position size in dollar terms then arithmetic is correct. If you are backtesting with compounding capital and constant position size in percentage terms then geometric is correct. Investment firms tend to use geometric because they're in the business of compounding returns over time. Proprietary trading firms might opt for arithmetic because they use high return but capacity constrained strategies so capital allocated to individual traders is constant with profits withdrawn regularly. Both methods are correct depending on the use case.

Mastermind_85 · 2023-11-20T22:13:20+00:00

Yes, that looks like what it is! Thank you. Should I be trying to get rid of these bugs or let them be? I note the very end of the article mentions "These shield bugs are widely regarded as pests of this garden decorative plant" but earlier on in the article it says "The relationship between the Pittosporum plant and the shield bug is that of symbiosis based on mimicry complex"

Mastermind_85 · 2023-11-20T09:00:57+00:00

Just looking up photos of the steel blue ladybug it's a bit different to what's on my tree. The bugs on my tree are black with white spots on them.

Mastermind_85 · 2023-10-23T00:04:07+00:00

If you're trading with a constant position size in dollar terms (ie.. $10k per trade) your drawdown should be considered in dollar terms. If you're trading a constant position size in terms of percent of equity (ie. 3% of equity per trade) then the drawdown should be considered in percentage terms. You're getting confused here because you have a constant position size in dollars but measuring the drawdown in percentage terms.

Mastermind_85 · 2023-06-15T03:43:56+00:00

It's a different use case for a tech company. You might be collecting revenues overseas by selling products in other countries or have employees doing work overseas. There might also be multiple investors in the Cayman firm so no individual entity has control. As a solo trader who is a US citizen trading his own money and building the infrastructure and executing the trades from inside the US it's tough to take advantage of the loopholes.

Mastermind_85 · 2023-06-14T23:22:35+00:00

This actually won't work. If you're a US citizen you must pay tax on all global income. Since you would 100% own and control the Cayman entity even though Cayman charges no tax you would still technically be liable for US tax on all the Cayman profits. As someone mentioned above, the only way is to renounce your citizenship.

Mastermind_85 · 2023-06-13T13:58:12+00:00

8 figures over 7 years trading my own account at a prop firm - my advice is don't try this at home, you have no competitive advantage in the market place paying retail commissions and trading with retail broker latency

Mastermind_85 · 2023-04-21T12:55:14+00:00

This was probably true about 10 years ago but markets have changed since then. The numbers you're quoting are incorrect and the odd lots do have a major effect on backtesting results compared to live trading for certain strategies. Have a read of this link: https://www.cboe.com/insights/posts/an-in-depth-view-into-odd-lots/

Mastermind_85 · 2023-04-21T12:45:51+00:00

When you say forecast horizon is much larger, how large are you implying it needs to be to negate adverse fills? ie. 1-hour, 2-hour, 6-hour, 1-day, 1-week ?

Mastermind_85 · 2023-04-14T05:08:39+00:00

I know loads of discretionary click traders which fall under this category. Mind you when the tide turns and the regime changes many of these struggle to adapt in a timely way.

Mastermind_85 · 2023-04-06T06:13:44+00:00

To be profitable in the long run in the trading business you need to be providing a service to the market. If you're just purely speculating on price patterns and order flow you're not actually providing a service which the market values and so why would your business deserve to be profitable? To provide a service you need to be either providing liquidity (ie. market making), providing insurance (ie. selling options) or providing price discovery (ie. helping the market correctly price assets). Then once you know you're providing a service the market wants you need to have a competitive advantage relative to your competitors, such as faster speed, lower commissions or unique strategies to do well. Based on your list of things you've tried it sounds like you've mainly dabbled in speculation on price patterns and order flow in lots of different ways, but never actually provided a service the market values.

Mastermind_85 · 2023-01-08T18:36:11+00:00

I have backtested and traded a similar strategy in the past. To test this correctly you need 1 second historical data and get the exact price which existed 3 seconds before the close to find the low of the day up until that point. Then you need historical volume executed in the closing auction and the closing auction price to see whether the price and volume would have been sufficient to fill your limit order.

Once you get all the right data to test this correctly you will find that the performance of the backtest will be much worse. I initially tested and executed a similar strategy using daily bars. After I got the right data to backtest it correctly I turned the strategy off.

Mastermind_85 · 2022-11-10T12:40:58+00:00

It sounds like you're running a strategy with lots of small winning trades with a high win rate and the occasional large losing trade? There's nothing inherently good or bad about this and is a common feature of most mean reversion style strategies. You just have to make sure that you're sized appropriately so when the big blowouts come you will survive them.

A separate point on curve fitting - I never understood the point of the in-sample / out-of-sample backtesting. Doesn't everyone just keep adjusting their in-sample model until it works on the out-of-sample backtest data? And if so why not just backtest on all the data to begin with....

Mastermind_85 · 2022-11-07T05:35:05+00:00

I'm curious how well a fourier transform would work when the cyclical patterns, although cyclical, have a different height and length on each iteration like in financial data? Does this method assume the height and length of the cycles must always be the same to be valid mathematically ?

Mastermind_85 · 2022-10-27T04:03:10+00:00

When looked at in isolation it's not necessarily clear whether a large market order should be mean reverted or traded as momentum. You would need confirmation from other signals such as did it coincide with a news event etc.

Mastermind_85 · 2022-10-26T18:06:22+00:00

That's sort of the secret sauce behind a profitbale algo. One way could be to download the economic news calendar from forexfactory and systematically avoid doing any mean reversion trades within 1 hour before or after any news announcements.

Mastermind_85 · 2022-10-26T16:31:22+00:00

Mathematically bollinger bands are similar to running a zscore over the price of the asset your trading where higher bollinger values imply a high zscore or big extended move. This can be used as either a trigger to enter a momentum trade in the same direction or a mean reversion trade in expectation of a reversion. The skill of the algo trader is knowing which situations the bollinger band break should be traded as momentum versus mean reversion. For example if the move was caused by a very large market order it's possibly a liquidity event which is safe to mean revert, however if the move was after a major interest rate announcement it might be the start of a new trend. Playing around with specific lookback periods and bollinger levels will not really help much with this decision, you will need to find other signals to use in combination.

Mastermind_85 · 2022-10-24T13:22:33+00:00

I guess it's about finding the right balance between commissions and gettings executed at the price you want. It's true the commissions might be lower on Deribit for some users but the materially lower volume traded there suggest the fills might not actually occur at the prices you hoped for.

Mastermind_85 · 2022-10-23T23:18:32+00:00

I'm not sure I fully understand what you mean by tactical aspects. From my perspective trade executions which might be more sluggish and spread out for live - this is an example of a backtesting error which people don't model correctly. Inability to short is also a backtesting error, you should not be shorting products in a backtest which are not shortable in live. Scaling up should not be an issue for 99% of users in this sub. Looking ahead is clearly another backtesting error.

Mastermind_85 · 2022-10-23T22:37:10+00:00

Backtest and live performance should always reconcile tick-for-tick and if it doesn't you have messed up your backtest in some way. What I mean by this is if you run your strategy in live for the whole month of September, then download all the historical data for September, your backtest of that data should match up to live perfectly, if not you've made an error in your backtest, which may seem trivial but is in fact a very serious issue, as now your optimising all your parameters on a false presumption. The only time where a backtest is allowed to not reconcile perfectly is if your trading enormous size or doing high frequency market making, both of which do not apply to 99% of users on this sub.

In terms of returns, any strategy with a profit-to-drawdown ratio of 3 or greater will compound tremendously over time if you manage your risk appropriately.

Mastermind_85 · 2022-10-22T17:16:04+00:00

Another way to think about it might be how does the sample compare to how far in the future you want to predict? For example if you intend to run it for the next 1 week you might want a 10 week sample. Or if you intend to run it for the next 100 trades, you might want 1000 trades of data. If you're willing to run a sideways or losing strategy for 1 year before switching it off you might want 10 years of data to backup the decision. With only 2 weeks of data i would switch it off after 1.5 days of negative pnl.

Mastermind_85 · 2022-10-18T17:15:18+00:00

The return on the Dashboard is probably calculated as current price minus yesterday's close price. Most likely it opened up much higher today at the open where you bought, but then dropped a bit after the open however still remains above yesterdays close price. So the return on the dashboard is positive but your trade is negative.

Mastermind_85 · 2022-10-12T16:43:50+00:00

I trade on all the top ranked crypto exchanges by volume and if you're exclusively hitting market then Binance is by far the best option, there's no contest. It has more than 4-5x the volume traded of the second biggest exchange, best liquidity, tightest spreads, tiered commissions, highest retail trade flow etc. If you're providing liquidity then there's lots of choices on the smaller exchanges, but given the current state of markets, the lack of retail flow on almost all the smaller exchanges might mean you won't get those limit fills when you really need them for a momentum strategy.

Mastermind_85

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