Historical Price Testing

"Systems traders make forecasts
- based on historical prices."

You'll hear it said - sooner or later, "the markets repeat themselves, so if you're wise, you'll be ready for them when they do."

You will also be told that professional traders are always delving back into the past, in order to produce their forecasts for what's coming next.

All of this is totally wrong. If professional traders know one thing - it is that nobody can forecast for certain what the markets will do - even one minute ahead. So they never make predictions because obviously it would be a complete waste of time.

So what is it then that these traders are doing with historical prices?

They use them to test their new systems ideas. If you have an idea that might be a good one, what else could you test it with than past prices? Of course, you would love to be able to test it on future prices but we all know that's completely out of the question!

OK so you take some systems rules, perhaps containing a new idea. Then you test them on past prices and if they show a profit, you use them that way in future?

No! That's not the way. That would be just a massive exercise in what is known as curve fitting - one of the worst sins you can commit in commodity trading.

Professional traders use historical prices in a particular way to discover if any 'chosen' system rules are capable of producing satisfactory results (i.e. results that meet their own personal trading goals).

The key to this process is the method they use to select their markets, set goals and evaluate the capabilities of different system rules. It is not a search for rules that would have done well in the past under particular circumstances - and that 'might repeat themselves'.

Professional traders use systems that trade the markets according to what is happening now and forecasts, predictions - call them what you will, never come into consideration.

 

Modus Trading
Contact David

Copyright David Bromley 2006
All Rights Reserved.

 

 

 

 

[Close This Window] Sample content here.