This document is a brief introduction to the BackTester product.
BackTester is an investing tool that helps you:
Verify which strategies work and which don't
Make money by alerting you to strategies and stocks that have a higher potential for return
Help you test a trading idea that you may have
Shows you methods to turn a small amount of money into a huge amount
Find one trading strategy that could make you rich
Verify strategies which you create to see if they work or some close relative works
I started investing in the late 90's during the dot-com craze. I would read Investor's Business Daily, watch CNBC, purchase investing books, but how did I know what the talking heads were saying was true? I also noticed that when you look a chart with technical analysis on it, it appears to work. I ran a few tests using market data on the Yahoo website and found that there appeared to be misinformation being disseminated and the graphs did lie. So I started developing a program to test this information. I also wanted to see if I could "beat" the market. The idea for Backtester was born.
My first goal was to be able to download the data from Yahoo and be able to use it for my studies. I developed a program called GetData.exe. This program's purpose was to accept a request for data and download the data to a database that could be used by BackTester.
I had a few missteps while developing the tool. One time I thought I would be a millionaire, from a strategy I tested that appeared to perform very well. It was very exciting to thing this, but low and behold a calculation mistake separated me from the big bucks. I realized that any winning strategy had to be extensively verified before I would risk any money on the trade.
Three problems with BackTester: 1. If it works, I won't sell it, I'll trade it and if it doesn't work, I can't actually sell it, quite a dilemma. 2. Some problems that conflict with BackTester is the EMH or the Efficient Market Hypothesis, which basically states that if there is any opportunity to make money in the market, then smart investors will find the opportunity and it eventually will no longer exist. 3. While working at Instinet, I came to know a number of math experts who aren't trying to beat the market. They have extensive experience with statistics and don't believe you can predict the market.
Fundamental vs. Technical Analysis
Fundamental analysis uses a companies "fundamentals" such as revenues, costs, profit margins, growth rates, intrinsic value to find undervalued stocks. Technical analysis uses past price movement and market indicators and concepts such as support and resistance, and chart patterns such as "head and shoulders", "trend-lines", Volume/Price movement to predict the market. I don't favor one method over the other but I do believe that they are really the same thing. Both use the past to predict the future. Technical analysis is easier to work with, but fundamental analysis can be codified just the same as long as you have the data to test against. BackTester is based on the concept of finding patterns that work and using these patterns to give you an advantage. Whether technical or fundamental, can the past data predict future performance?
Does it work?
I don't know. I haven't made or lost a penny while working on the software, as I haven't traded it. I feel it needs more testing. In addition, I lost lots of money in the dot.com era in the stock market and I'm a little hesitant to risk any more money in it. System also hasn't been optimized in any way, which I think could improve its performance, but could actually hinder performance.
In forward testing currently has produced some interesting results. The system, on October 13, 2003 is up an annualized rate of 23.9% and a total of 41.1% over 625 days. There are three problems with this result. 1. No transaction costs have been taken out of this return 2. System uses end of day prices, which can be difficult to achieve and may not be easily incorporated into a trading model. 3. There hasn't be any real world trading which could easily change what the system has accomplished.
How does it work?
On day two through current day, the system does the following: 1. It examines all open trades to see if there is a change in the trading signal. If the trade was long and now a short signal is calculated, the system will close out the trade. 2. This will continue for all 10 stocks. 3. After this has taken place, there will be a number of accounts that have been closed out. These accounts will have new stocks selected based on the algorithm above starting with step 1 by selecting a random stock.
After all the stocks have been selected, the system analyzes 5 stocks that have been following with fixed trading strategies. System also lists the trading signal (i.e. Sell if Nasdaq closes below 1509.23 on Thursday.) System also posts statistics for the trades such as:
Current signal ( Long or short)
Date signal first occurred
Percent win/loss rate
Average win percent
Average loss percent
Average number of trades per year
What $100,000 would become
The buy and hold investor's:
Price that a signal reversal will occur if it can be calculated
A link to a page that has the hypothetical trades for the stock
Where did the strategies that BackTester uses, for "Pick and Post" come from?
BackTester has a back-testing mode. The system in this mode will take a number of pre-specified strategies and back and forward test them bases on the following algorithm: 1. BackTester randomly selects a date in the past and assumes it is the current date 2. For each strategy, it 2.1 Back-tests the strategy for a time period up to the randomly selected date 2.2 Forward tests the strategy from the randomly selected date for some time period 2.3 Records the results to determine what strategy best predicted a future return
The resulting data will show which strategies have performed the best in the past.
Where did the BackTester strategies used for Back-testing come from?
BackTester allows you to test trading strategies quite easily. Say you want to see how well an investment in Microsoft would have been had you traded it on the 40 day moving average. The system can also find which of the moving averages would have performed the best over a specified time frame.
What else can it do?
Support of approximately 50 trading strategies
Test a stock on a strategy over a date range
Associate a strategy with text description
Set Costs per trade
Spread basis points
Market impact basis points
Open Web pages with stock information
Yahoo Real Time
Raging Bull message board
Single step a strategy
Select a Stock randomly
Multi-testing - Test every moving average strategy from 2 day to 200 day
BackTester currently supports testing of the following of about 50 strategies and features: