I'm starting a round of backtesting and wanted to ask the community for guidance on how to set up backtesting. Do you test how you trade or trade how you test (in theory, both should be the same, but Jim has a saying about theory and practice...)? Do you follow a complete, rule-based system for adjustments, leave room for user discretion, or how do you set up your standards?
I'm starting to test a Road Trip clone (since I don't have the full guidelines except what's in the presentations, I'm assuming I won't be trading the actual RTT) and curious if this, or other BWBs have testing strategies that you guys follow. I'll be using OV and ToS for some analysis. My thoughts are the following:
-Look to open 75-85 DTE and target entering on a down day of at least 10 points, since it is a Vega negative trade.
-Trade anytime after 9:30am Eastern time and plan to close trades after 2:30pm Eastern
-Use monthlies, weeklies, and quarterlies
-Total risk (upper profit/lower loss) 3.5% or less
-RH on down days when the RH will not bring the BE@ exp or 1/3 of max loss closer than 60 points.
Any other considerations either for the RTT or similar BWB or flies? Suggestions appreciated.
I am not sure you will find very many trades that you can trade on a complete rules based system as this market is continually evolving. I think you need to have a few "arrows in your quiver" for different adjustment strategies for the same trade to give you some flexibility. With a rigid set of rules you may find that there will be periods of time or events which would lead to poor trade performance, resulting in giving up on a perfectly good trade.
When I start developing a new trade I will look at some big market moves, both the downside and upside and see what happens to the trade without adjusting. This should give you a feel for its weaknesses and help develop an adjustment strategy. Then back test those times with that strategy to make sure the adjustments do what you are expecting. If that goes well then I would back test a few years. Rather than focus on how much the trade made it is more important for me to see how much the p/l swings and how big the daily draw downs are. There is so much more that can be discussed but I think that is enough to get you going.
Hope this helps