<5 min read.
Backtesting can be exciting in that an unprofitable system can often be magically transformed into a money-making machine with a few optimizations.
The quote above can give you an idea of how one becomes a profitable trader. The first step comes to one thing: backtesting.
We all know being profitable is not as simple as having an strategy (I also like to use the word framework, like other traders do) , since that is only the first step to which other aspects of trading follow, like psychology, execution, risk management, etc.
However, without having resolved this trading cornerstone is not likely you will ever become profitable.
But backtesting isn't the topic for this post. I want to discuss how I approach another method (and you can too) which is also used when testing trading ideas for profitability.
You can read more on the different methods of testing a strategy here: https://www.investopedia.com/articles/trading/10/backtesting-walkforward-important-correlation.asp
This Kaizen (Japanese: 改善, 'improvement') idea will help you:
-Test new trading ideas.
-Improve existing ideas.
-Add new metrics to existing ideas.
-Tweak strategy to improve certain aspects of the strategy, i.e: entries, exits, invalidation, risk management or stop losses.
It's very practical and efficient:
-It will save you long working hour inputs, having to put many hours of work at once.
-Evaluate if a possible idea is worth to continue researching or it's best to spend time on another.
-It will allow you to draw conclusions and improve on ideas which already had the previous backtesting work done.
Enough introduction! Let's get to it.
Every day you mark the charts with levels and tools you need for your day's trading, so do this with little extra time and you will get results.
Each day, I mark some other levels which I believe could have an impact on market participants, being likely they could trigger a reaction. It only takes organizing some folders on your object tree on TraingView, for example:
Once I have collected a decent sample of markings I've been able to identify things like:
-Price reactions.
-How the progression of this metric (i.e: day opening) on consecutive days can relate to certain price action patterns, for example: wide distance between two consecutive day opening's lead to a day of low volatility (not real just for the purpose of giving an idea).
-Relation between different metrics associated to a result. Let's say you're marking day openings and previous day equilibrium. One might find a relation between the two, for example, when a day equilibrium is very close to a day opening price tests more often the day opening than the equilibrium...(again, this is not a real result).
This is how I found the idea of the first Seven Days of the Month for Monthly bias and trade ideas. Explained on this post:
An example marking previous day equilibrium. See how visual it is to find patterns on price action.
I thing you get the idea. I have shared some charting ideas on a previous post entry:
https://buymeacoffee.com/kaizenchart/ta-ideas
By collecting more data you will have more feedback to work with.
Where I want to get with this is that doing this will gives room for improvement on how to approach my analysis and the ability to adapt to changes on the markets.
You can do the same with your past trades to support your trade journal.
This was all for this topic, all though it can get much more complex than this I wanted to share this as it might be useful to some, specially when you don't know where to start from to create a strategy or have no previous experience on backtesting/data collection.
Thank you for reading!
I hope you have enjoyed the read and found some things interesting which will motivate you to try on the charts.
These blog entries take quite some time and effort to put together, if you want to support by any means I would appreciate.
You can follow me on twitter, share the blog post there, or of course you always have the option of buying me a coffee (which helps to boost motivation even if it doesn't pay the bills).