22 Nov Premise for backtesting criteria
Premise for backtesting criteria
I haven’t uploaded a blog post for a little while. That is not because I haven’t been spending time on trading. I have. It is just that I wanted to focus more on trading than blogging. Which I have and now I have come to further assumptions on the market. Now, I have to go back and test these assumptions to see to what extent they hold up.
So what I want to do is look for possible patterns in the different trading sessions. For example, I already know that the highest volatility is during the London and New York trading sessions. This is when the biggest moves happen. I’ve also learned that at the opening of each trading session the direction is usually established for the rest of the trading session. This is not always the case but this these are the parameters for the premise that I want to backtest.
Another part of the premise is the assumption that the biggest ‘level-changing’ move happens on the Fridays. There can be other days that there is a significant move but ‘usually’ not a level-changing move. By level-changing I mean that the price range changes drastically either up or down (ie. go from the 50–52 price range to the 52–54 price range).
These level changing moves I can track by using the Fibonacci drawing tools. I usually just use the Fibonacci retracement tool. I have the assumption that when price action retraces above the 38.2 Fib. level it will most likely continue in the same direction. If it hits the 50 level we can not be so sure. If it hits the 61.8 level we can expect a reversal.
Targets of backtesting
- When a trading session opens, does it actually just trade in that direction?
- Is the level-changing move usually on the Fridays?
- When there is a level-changing move, how do the Fibonacci levels behave? Is my assumption right?
If you would like me to post my results or would like to know more about them please contact me.
Putting it into action
How am I actually going to perform the backtesting? Now that I have the premise for my backtesting I will ‘go back in time’ on the charts in a way that I prohibit myself of seeing the next candlestick on the chart. Then I will fake taking trades based on the premise of my assumptions and gather results. How many times am I correct and how many times am I wrong? What could I do better? How long back am I going to backtest? About two months. I believe after this I have gathered enough if the assumptions used in my premise actually hold up enough for further research and backtesting.
As always thank you for reading and let me know if you have any questions or if you would like me to post my results. At this time I am not sure if I should or not. Go on… convince me I should.