“It took me quite some time to understand what the coaches meant when saying that you have to find your own trading style. […] What fits one trader’s personality might not fit another’s.”Justin Driskell —
Hey #TeamTackle. Justin here again bringing you another addition to the series on my backtesting journey.
Last month, I talked about why I started backtesting the different Scouting Reports. If you haven’t read that yet, check it out here. It is the prerequisite to this article. Today’s blog is about what I learned during my backtesting.
As a reminder, I used the Scouting Reports for my speculation trading. These were aggressive type swing trades using long and short stock, long calls and puts, bull call, bear put, etc. For some reason, though, I was not finding success with the reports. Which is why I started backtesting in the first place. So now that the stage is set, let’s begin discussing what I learned from my backtest. Let’s make this simple and just list them out one by one.
1: Risk/Reward Ratio is more important than Win/Loss Ratio
First things first, when trading directionally, Risk/Reward Ratio is more important than Win/Loss Ratio. In every one of my tests, I had more losing trades than winning ones, but since I had a good reward to risk ratio, the net profit was positive.
2: Sample size matters
Second, if you want to see if a system will work in the long run, you need a large enough sample size. Testing five trades will not tell you if a system will work, but testing 30, 40, or even 50 plus trades will give you a better idea of what to expect in the long run.
3: What to expect from the system
Third, using the data received, you need to determine what to expect of that system. If you take a drawdown, you need to understand if it’s normal. In my backtest, there were some instances where I lost up to seven trades in a row. That may not seem like much but if you risk 1% of your account per trade, then that’s 7% of your account gone before getting a winner.
4: Position size
Fourth, using what you learned about what to expect can help you determine position size better. If the idea of a 7% drawdown sucks to you then you need to lower position size. If you are a gunslinger and think 7% is merely a flesh wound, then maybe consider risking more per trade.
5: Build confidence, control emotions
Last but not least, backtesting helps build your confidence in your system which helps control your emotions which helps you stay the course. You can’t capitulate every time you take a drawdown that you predetermined already as normal. That is how you slowly blow up an account or eventually give up because “this stock market stuff just doesn’t work.”
I do encourage each of you to do your own backtest with your own rules. Determine what is normal for your system and tweak it to perfection to fit your personality. It took me quite some time to understand what the coaches meant when saying that you have to find your own trading style. I just wanted someone to give me a set of rules and tell me what to do, but now I understand it cannot work that way. What fits one trader’s personality might not fit another’s.
Until next time traders.
Justin started his trading journey during a 3-day workshop with Tim Justice in April of 2018. He has always been interested in the financial markets and the opportunity it potentially provides. He likes trading stocks and options. Outside the markets, he’s a husband, father of two boys, and full-time automotive technician.
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