Day Trading & Forex Forum

Throughout the years I’ve been trading and writing I've often written about mind set—having  the right frame of mind for your trading so you become a winner.

I've stated that it is our job to trade "futures," not "histories."

The future is the next bar on your chart.  You can't possibly know how it will develop, how fast prices will move, or where it will end up.  Since none of us know where the very next tick will be, it's impossible to know where the tick after that will be, or the tick after that, etc.  All we know at any one time is what we're seeing.  Interestingly, what we're seeing may not be true.

Trouble With Data

If we are day trading, we are not sure that what we're seeing is a bad tick, especially if it is not too far astray from the price action.

The daily bar chart doesn't always tell the truth, either.  The open may not be where the first trade took place.  The close is merely a consensus, and may be quite a bit distant from where the last trade took place.  The high may not have been the high, and the low may not have been the low.  If you don't believe that, then I challenge you to pick up any newspaper and take a look at some of the back months.

For example if the exchange has reported that a back month they opened at 9755, with a high of 9802, a low of 9760, and a close of 9784.  Does that make any sense?  How can the low be higher than the open?  How can the close be higher than the high?  Yet that's the kind of garbage we have to put up with in this business.

Now you know the problem with back testing.  Back testing and simulated testing are based on nothing but lies.  That's why they don't work when you actually put them to the test with real data.

Back Testing

In fact, there are many reasons why back testing and simulation won't work, and I may as well dump them in your lap right here.

Because you don't really know where the high or low were, or if the market ever really traded there, you don't know if your simulated stop was taken out or not.

If you say you have a system in which if you get three up days followed by a down day, the market will be up twelve days from now 82% of the time, then your whole statistical universe may have been based on what is not true.

Have you ever watched cocoa from the open to the close?  You can clearly see it trading at the open, but by the time the market closes, the open will at times be placed opposite the close.  That might be fifty or more points away from where you saw it open and trade, and also as born out by a report of time and sales.

The way they report cocoa prices is going to give a fit to a lot of candlestick traders.  Why?  Because they are going to see far too many "doji's" (open=close), more than are really there.  Cocoa is not the only culprit, but historically, it is certainly one of the worst

When you see a completed bar on a chart, you have no idea which way prices moved first.  You don't know if they moved down first or up first.  You don't know whether or not prices opened and then moved to the high, went down to the low, and then traded in the lower half of the price range until the close, at which time prices soared up to the high and closed there.  You have no idea of the overlap.  I've seen prices trade from one extreme to the other more than once at each extreme.

In any of those instances, your protective stop could have been taken out intraday. 

You know nothing of the market volatility on any given day, once you see a completed price bar.  Were prices ticking their normal, exchange minimum tick, or were they ticking two or three times the minimum every time prices ticked?

Even if you purchased tick data for your simulation, showing every single tick the market made, you don't know what the volatility was.  For instance, you don't know if the S&P was ticking five minimum fluctuations per tick or twenty-five minimum fluctuations per tick, and if it was doing it quickly or slowly.  You don't know and you can't know, and anyone who tells you their simulated system works, based on such phony baloney, is a liar.