One Problem of a Backtested strategy

[johntherevelato]

In a trading strategy, how does one account for the fact that one hasn't applied the strategy in real time and that therefore the market itself hasn't been affected by the opening of the positions for the instrument in question.

I suppose for highly liquid instruments like the S&P 500 emini, it wouldn't really be an issue right?

[glay]

I've been working with the backtester a round the clock for a few weeks now. There are certain variables your just never going to be able to simulate 100%. There is just no possibile way to know:

A) What fill price you will get on entry or exit. This can make or break a system. Change strategy.market to stragety.close and see what I mean.

B) How your trade will effect the flow of that instrument. If your trading 500 shares or 4 contracts or less at MKT then I wouldnt worry about this. I would NOT use an auto system on a stock that traded less then a million shares a day.

My tick play results have been BETTER then the back test. Tick replay is the market recorded tick for tick. Still that doesnt account for your fill and effect on order flow. The best way is to take it live with light amount of shares. Paper traders give unrealstic fills so please add slippage. For ex: I have $10 of slippaged added in for my dow emini YM trades. Thats 2 points. (dow is $5/pt).

Code a few. Try them with different time frames, intervals. Record the results in an excel sheet so you can easily compare. Once you execute it, STICK TO YOUR PLAN or else you did all that work for not.

Good luck.

[demarcog]

Re: One Problem of a Backtested strategy

Originally posted by johntherevelato
In a trading strategy, how does one account for the fact that one hasn't applied the strategy in real time and that therefore the market itself hasn't been affected by the opening of the positions for the instrument in question.

I suppose for highly liquid instruments like the S&P 500 emini, it wouldn't really be an issue right?

It is less of an issue the more liquid the instrument depending on the size in relation to the current bid if selling or ask if buying.

You could program your EFS to query the currentBid/Ask size and see if there are shares/contracts available to fill your order.

For the most part, for highly liquid instruments a small order has no impact on market movement.