On a day like today when I am not trading, I am probably backtesting. Backtesting is the foundation of what I do and is immensely valuable to novice and experienced traders alike.
I use backtesting to develop new strategies, refine my approach, build my confidence and help me with risk management. It’s the risk management part we’re touching on here.
At the moment, I am backtesting the GBPJPY from 2005 with my Daily Flow strategy. My goal is to get through 10 years of backtesting today. I have completed just three years so far.
Here is what I have:
I start with a $10,000 account and I’m passed the $100,000 mark in about 3 years.
Which is very misleading.
Because, to make my testing as rapid as possible, I haven’t taken my risk into account for each and every trade. I manually adjust the risk in a spreadsheet once all the data are collected.
Do you see the little red line at the bottom of the graph? That’s my drawdown, and in this test, it peaked at about $15,000. Now a $15,000 drawdown on a $100,000 is a lot, in my opinion. On a $10,000 account…well its a blown account isn’t it? So in this test, my biggest drawdown happened well into the testing.
But it could have happened right at the beginning of the testing period.
And this is a reality in real trading. You might start a system and hit an immediate drawdown. You have to be able to survive that drawdown!
So, when I’ve tested at least 10 years on this pair, I will have an idea of what the worse drawdown I can expect is. And then I will assign a “$” value to how big I am willing to let that be. That gives me my position size to trade.
Let me know if you’re interested in seeing the full test results when I am done. if you’re interested in seeing the full test results when I am done.