I am frequently asked how long one should backtest a online daytrading system. Though there’s no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your online daytrading system:
Trade frequency
How many trades per day does your daytrading system generate? It’s not important how long you backtest a daytrading system; it’s important that you receive enough trades to make statistically valid assumptions*: If your online daytrading system generates three trades per day, i.e. 600 trades per year, then a year of testing gives you enough data to make reliable assumptions*. But if your trading system generates only three trades per month, i.e. 36 trades per year, then you should backtest a couple of years to receive reliable data.
Underlying contract
You must consider the characteristics of the underlying contract. The chart below shows the average daily volume of the e-mini S&P:
It doesn’t make sense to backtest a trading system for the e-mini S&P before 1999, because the contract simply didn’t exist! In my opinion it doesn’t make sense to backtest an e-mini trading system before 2002 because at that time the market was completely different; less liquidity and different market participants. I believe that a reliable testing period for the e-mini S&P are the years 2002 – 2004.
Well, you say you’re ready to being investing, on your own. No stockbrokers, no financial advisers, just you and the open market. What a thrilling prospect. Wait, are you seriously considering this proposition?
Please allow me to give some advice: Don’t do it. I speak with some experience, having lost my fair share in the “open market” as a do-it-yourself investor. The odds of success in this kind of investing are comparable to the odds of wining the lottery. It’s a crap shoot. Unless you are willing to take the time to investigate, investigate, and then do some investigation. Successful investing is not a privilege of the stock broker and the financial analyst, alone. It is an area open to voluntary participation from any walk to life. The catch here is that you must be knowledgeable, or you will lose.
Take the time to understand all the components of the investing arena, before you risk losing your nice little nest egg in ten minutes or less. What you have spent a lifetime saving can be gone in as little as ten minutes. Now, that should be a scary thought for any sane, rational, investor.
If you still intend to invest alone, here are a few tips and guidelines to help ensure your success. If you are going to invest, at least hire some form of investment professional to give you advice. It’s not necessary to let them do the investing, but use common sense, here. They know things you do not, and have not had time to learn.
Another piece of advice: if it sounds too good to be true, it is. Hands down, dream investments do not exist. If you know someone who acted on a friend’s great tip, you can bet that someone worked hard for that information, and it probably isn’t going to produce the mega return promised.
You must be patient when investing. Investing is like saving, it takes time to accumulate real returns. Don’t panic, take the time to step back and look objectively at your investment and the market indicators. Panic will cost you money. Hand in hand with the patience, there must be some read education about the investing process on your part. If you’re going to invest, take the time to learn the process, learn how to read a prospectus, how to calculate and distinguish a healthy business from one that is about to fold. Your knowledge will be your ticket to successful investing with a show of real returns.
It can be done, it is done everyday, by people just like you and I. You just need to understand the enormity of the commitment necessary to become a successful investor.
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