I recently worked with a systems trader who was completely obsessed with the fact that his backtesting software did not perfectly reflect the reality of his actual trades.
He was so fixated on this difference that he was planning a total rewrite of his backtesting software to use an algorithm he believed would be closer to reality. (A combination of bid/ask, depth of the order book, and other fancy logic.)
What this trader was missing was that no matter how good your backtesting software is, there will still be significant differences between your simulated results and your live trades. No amount of software engineering can overcome this fact of life.
Just because it’s technically true you could eke out some improvements by jumping through a lot of hoops doesn’t mean you should go through the effort.
This is a common pattern in people who come to trading from a technical field like software development.
They often focus on work that is technically possible but has a tiny payoff.
Lord knows I’ve gone through a lot of these wild goose chases myself in my trading over the years. Having developed many strategies I know what things will pay off and what will be a waste of time.
One of the most fulfilling things for me as a trading coach is helping traders focus on the things that will have a big payoff and avoiding the things that sound appealing but will ultimately be a waste of time.
