Why I Started Backtesting

I began serious trading in 2005. My first strategy was purely manual and an imitation of what a well-known blogger at the time was doing.

He had more trading experience than I did and I learned a ton from him. (He’s no longer blogging these days.)

Luckily my imitation strategy worked pretty well – enough to keep my attention and make some money.

I was an automation nerd at the time (and still am!) so when I learned that you could create code to backtest a strategy, it appealed to me.

When I asked my trading mentor about backtesting, he pooh-poohed it. “It’s not real trading – it’s all simulated. Take real trades and learn what works.”

So I put off creating a backtest – for a good while based on his advice.

Until I could no longer ignore the potential benefits.

Here’s what I realized backtesting could do for me.

While my trading strategy was making money, several aspects of it were completely arbitrary.

For example, I used a minimum relative volume filter of 3 in my strategy.

Why 3? Because that’s what my mentor used and I was imitating him.

It dawned on me that imitating others is a great way to start, but I was never going to be truly successful by copying someone else.

I had to be able to make my own decisions and not rely on anyone else for my trading edge – not even a good friend.

So I created my first backtest.

And I quickly learned just how arbitrary some of my trading rules had been.

That minimum relative volume value of 3? It wasn’t terrible, but lowering that while adding another filter was way better.

How much better?

It allowed me to increase the number of trades in my trading system substantially AND increase the profit per trade.

An enormous improvement.

As valuable as that was, it wasn’t even close to the most important benefit of backtesting.

I now had a process for gaining confidence in my trading.

A path to increasing my position size to generate meaningful profits, knowing that I had an edge.

At that moment I was no longer an imitator but a real trader.