Alvin Chow writes informative articles on themes of interest to investors. He is the founder of BigFatPurse.com , loves the financial market, and curious to find out what work and what doesn't work in investing.
Backtesting T3B System
Funny that I did not backtest the trading system that I have been using for 2 years. And I realised this is precisely the reason why I am not profiting from it. During the recent gathering, I was decided to do the back test and was convinced that the system works. It was me that did not apply the rules properly. Here are some results of the back testing that I have done:
Back testing parameters:
- Allocate $10,000 when buying/selling a stock
- Commission of S$25 per transaction
- Financing charges not considered
- Based on 1 year timeframe (before 1 Aug 10)
One of the rules of the trading system is to choose a nice trending stock, and thereafter, buy after the resistance is broken and sell after the support is breached. To make the test more robust, I have included the stocks that do not have nice trends. A total of 7 stocks are shown here. 4 of them have nice trends (CSE Global, CWT, Kepland and OSIM) and 3 of them have sideway movements (OCBC, STI ETF and Capitaland).
CSE Global
CWT
OSIM
Kepland
Capitaland
OCBC
STI ETF
Based on the results, I should have earned 575+1485+4335+2960-700+220-800 = 8750 for one year. This is done mechanically, buy and sell based on the rules without questions asked. The only discretion is to select which stocks. The key is to choose the nice trending stocks (based on the premise stocks have momentum, and price trends in a direction for a period of time). Note that there can be losses along the way, in fact, half of the time I would lose, but as long as I continue to buy and sell the same stock, I would be rewarded over the long run.
After backtesting, I realised what is my problem. I did not stick to a trending stock and I was always second guessing the system all the time. I thought I knew better. For example, OSIM has a good trend, but I did not buy it after I cut loss on the stock. The 2nd breakout was where the profits were. I was too fickle minded with stocks. Once I cut loss on one, I would choose another one to invest. It is easier said than done as it is emotionally uncomfortable buying back something you have lost money on. The right way was to stick to a good trending stock, and ride the trend as long as possible. That is how the system is supposed to work. With this backtesting, I have more confidence to trade with the T3B system.
- See more at: http://www.bigfatpurse.com/2010/09/backtesting-t3b-system/#sthash.awqRmfHY.dpuf
Source: http://www.bigfatpurse.com/2010/09/backtesting-t3b-system/
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