Indicator Trading Probability (IMPORTANT) – Why I Back Test Trading Strategies ONLY 100 Times?
I have tested many different strategies on the Trading Rush Channel, right? Occasionally, someone will ask, Why I only Back test A strategy 100 times, and not 10000 times. They say Testing a strategy only 100 times, won’t show the Win Rate Accurately. Yes, that is true. But we don’t have to test a strategy 10000 times to see if it is a profitable strategy or not. We can do it by testing it only 100 times. And I’m going to prove it, how you can back test a strategy 100 times and start making money.
Remember the Back Tester Feature in the Official Trading Rush App? Well, I have Modified it just for this video. I’m going to use it to prove a point.
In my videos, Once I’m done testing an indicator 100 times, I always say, the win rate of this strategy is approximately this and that. I heavily use the word approximately whenever i talk about the win rate.
That’s because, when testing an indicator strategy 100 times, I’m not trying to show the accurate win rate. I’m trying to be close enough to the actual win rate of a strategy. That’s All we need, to see If that strategy can make money or not.
Let me give you an example.
Lets say, an indicator works 70 percent of the time. In other words, an indicator has a win rate of 70 percent. But we don’t know that yet. If we wanted to know that number accurately, we would have to test that indicator at least 10000 or more times.
But anyone who has been trading for a while, can tell, that testing an indicator strategy 10000 times is a very difficult task to do. It is very time consuming even if you automate the entire back testing process. because it will take more time to learn how to automate the back testing process, and how to code in the first place. It can take days to learn how to code, if you have no background in coding. It only takes 1 hour to back test a strategy 100 times manually. And You can easily find if the strategy works or not by back testing it 100 times.
But why do we want to know the win rate of a trading strategy so accurately? You don’t need to know the probability of an indicator that accurately to make money in trading. All you need to do, is find the approximate Win rate of a strategy. And you can do this by simply testing a strategy 100 times.
It will take these 100 random trades 10000 times. Once it is done taking 100 trades 10000 times, we will see how close we are to the accurate win rate when we back test a strategy 100 times. In other words, we will see what is the probability of being close to the accurate win rate of a trading strategy, if we only Back Test it 100 times.
That’s all. Now you know why I back test strategies only 100 times. There is a high chance that the win rate i will find by testing 100 times, will be very close to the accurate win rate of a strategy. All we need is to find if the strategy is profitable or not. If we find the win rate to be 70 percent after back testing, There is high chance that we are only off by approximately 5 percent above or below the accurate win rate. In other words, there is a very high chance that the strategy is a profitable trading strategy. It takes around 1 hour to back test a strategy 100 times. If we find the profitability of a strategy by testing it 100 times, why waste time by testing it 1000 or 10000 times. What are you going to do by finding the accurate win rate of a strategy, when most of the success in trading is based on psychology of the trader.
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FAQs
When you are backtesting a day trading strategy (15-minute timeframe or lower), it is usually enough to go back two to three months and start your backtest there. When you are backtesting a strategy on a higher timeframe, you will have to go back 6 to 12 months.
Is 100 trades enough for backtest? ›
If you're backtesting a day trading strategy, 100 trades is not nearly enough to see if a strategy is reliable. Let's say that you're backtesting a day trading strategy that averages 1 trade per day.
Why does backtesting not work? ›
This is that a profitable backtest does not prove that a strategy “worked”, even in the past. This is because most backtests do not achieve any kind of “statistical significance”. As everyone knows, it's trivial to tailor a strategy that works beautifully on any given piece of historical data.
Is there a 100 trading strategy? ›
A 100 percent trading strategy is an approach that involves investing all of your capital into a single trade. While this can be risky, it can also lead to significant profits if executed correctly.
What is the 6 rule in trading? ›
Rule 6: Risk Only What You Can Afford to Lose
Before using real cash, make sure that money in that trading account is expendable. If it's not, the trader should keep saving until it is.
What is the 2 rule in trading? ›
What Is the 2% Rule? The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To implement the 2% rule, the investor first must calculate what 2% of their available trading capital is: this is referred to as the capital at risk (CaR).
Can I make 200 a day trading? ›
A common approach for new day traders is to start with a goal of $200 per day and work up to $800-$1000 over time. Small winners are better than home runs because it forces you to stay on your plan and use discipline. Sure, you'll hit a big winner every now and then, but consistency is the real key to day trading.
How much do I need to make 100 a day trading? ›
You're really probably going to need closer to 4,000 or $5,000 in order to make that $100 a day consistently. And ultimately it's going to be a couple of trades a week where you total $500 a week, so it's going to take a little bit more work. Want to learn more about trading?
How many traders are consistently profitable? ›
According to a study by the University of California , Berkeley , only about 10 % of traders are able to consistently make a profit and succeed as full - time traders . This means that the vast majority of traders , 90 % , either break even or lose money in the long run .
How much backtesting is enough? ›
Aim for at least 200 trades in your backtest, but 500-600 offers even greater reliability for informed decision-making. Beware of "Data Fatigue": Excessively long backtests can mislead you by including drastically different market regimes.
TradingView has become one of the most popular platforms for backtesting strategies, with its easy-to-use interface and variety of built-in tools. In this comprehensive guide, we'll cover everything you need to know to effectively backtest on TradingView.
Why 95% of traders lose money? ›
The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.
Is it possible to make $1000 a day trading? ›
While it's not outside the realm of possibility to earn $1,000 a day by day trading, reaching that level on a consistent basis requires several things: knowledge, discipline and a lot of cash to start with. Here's what you need to know.
What is the 70 30 trading strategy? ›
The strategy is based on:
Portfolio management with 70% hedge and 30% spot delivery. Option to leave the trade mandate to the portfolio manager. The portfolio trades include purchasing and selling although with limited trading activity.
How much backtesting is enough for intraday trading? ›
The time period for backtesting depends on the average holding period of your position. If you are trading a strategy with a holding period of more than a month, then it is better to use a long time period, preferably 15 years. If you are creating an intraday strategy, then 10 years is a good amount of time.
How long does it take to backtest 100 trades? ›
It takes around 1 hour to back test a strategy 100 times. If we find the profitability of a strategy by testing it 100 times, why waste time by testing it 1000 or 10000 times.
How long should I test a strategy? ›
For strategies with an average holding period from 1 day to 30 days, 2 to 3 years is a pretty good rule of thumb. You should follow that up with 3 to 6 months of paper trading. Longer holding periods, more backtesting time.
What is the best way to backtest a trading strategy? ›
How to backtest a trading strategy
- Define the strategy parameters.
- Specify which financial market and chart timeframe the strategy will be tested on. ...
- Begin looking for trades based on the strategy, market and chart timeframe specified. ...
- Analyse price charts for entry and exit signals.
