T2W Trading Community

Not knowing how fast the market was means you can't really know what the slippage might have been.  The faster the market, the greater the slippage.  You can sit there and say that you would have gotten in at a certain price or that you would have exited at a certain price, but if you don't know the market volatility, and how fast the market was, you do not know enough to say that you would have done such and such.  Not knowing how fast the market was, you have no way of knowing how much slippage there would have been on your entry or your exit.  Without knowledge of slippage, you can't possibly know the risk.

That is also true of volatility.  Volatility is made up of range of movement, speed, and tick size.  If you don't know the extent of slippage, you will not know the extent of the risk you would have encountered.

As if that's not bad enough, you also don't know how thin the market was at the time you would have traded it.  If you are position trading, you can't go by the reported daily volume (which is always too late to do you any good), because there is no way to know what the volume was at the time your price would have been hit.  So here again you have no idea of what slippage you might have encountered, and once more you would not have known the risk.

Knowing the Risk

If you want to spend your money on trading systems based upon the unknown, then you must assume the risk of doing so.  Since this is a business of assuming risk, you are entitled to insure prices in any market that you care to. 

Insurance companies spend a lot of money to make sure that the risks they take are actuarially sound.  That is the equivalent of finding good, well-formed, liquid markets to trade in.  But any market can become totally chaotic.  Markets can become extremely fast, and they can become quite volatile.  So even if your system was back-tested in a liquid market, when that market becomes fast and/or volatile, your back-tested, simulated system will not be able to cope with it and you will lose.   It's like going out to write life insurance on a battle front. 

If your back-tested, simulated system does factor in some room for fast and/or volatile markets, then, when you will be trading in slow, non-volatile markets with the built in factor, you will be utilizing a system that is totally inappropriate for the slow, non-volatile market you are in.  The best you can hope for is an "optimized" system.  How can you possibly expect to compete with traders who are acting and reacting to the reality that is at hand at the time?

No Fortune-Telling

Extensive back-testing is for historians, not traders.  It is the wrong view of the markets.  Your trading must be forward looking without being ridiculous about seeing into the future.

If you don't know where the next tick is, how can you possibly know where the next market turning point will be?  Can you see into the future? 

Maybe you like to trade astrologically.  Those people are always trying to peer into the future.

In the auto business they have a saying, "There's an ass for every seat."  Likewise, there's a fool for every fortuneteller who claims he can see into the future.

I guess you can always go out to your local coven and hire a witch to tell you what beans will do tomorrow.  She may even be right from time to time.

You could always do as one charlatan did and run the biorhythm for each market based on the day it first started to trade.  Or, you can cast the markets horoscope based on the same date.  With the biorhythm, you'll know what time of day the market should be on its highs, and what time of day it will be on its lows.

You'll know which day the market will be ecstatic and reach a new high, and which day it will be down in the dumps and make a new low.  However, you'll find that from time to time the market will reach new lows on the day it was supposed to reach new highs.  Well, that's easy enough to explain.  You can tell everyone "We've had an inversion.  Until the market inverts again, the lows will be the highs, and the highs will be the lows!"