The Pitfalls of Back Testing

In our chat with Cesar Alvarez we talk about trading ideas, key concepts and pitfalls of backtesting, the impact of stops on returns, market timing, over-optimisation, drawdown and using multiple strategies in a portfolio. Topics discussed:

• Where to find trading ideas
• Why you should test all of your ideas, even if you think they won't work
• Pitfalls of backtesting you need to look out for
• How to identify coding errors in backtesting
• Some clues that indicate you may have over-optimised a strategy
• Issues with splitting data into in-sample and out-of-sample portions
• The impact of stops on returns
• Handling a 50% overnight drop in a stock price
• Finding your personal drawdown tolerance
• How market timing can impact a strategy
• Why you need multiple strategies in a portfolio

Disclaimer: Trading in the financial markets involves a substantial risk of loss and is not suitable for everyone. All content produced by Better System Trader is for informational or educational purposes only and does not constitute trading or investment advice. Past performance is not necessarily indicative of future results.