SIMULATION – Backtesting stocks in the system

The Simulation page provides the ability to review how a stock would have performed using historical OHLC data. Find it at Research > Simulation > System Simulation. You can select any date range to test, but the minimum should be one month. Three months is ideal, as it will generally provide a more realistic near-term profit outcome. You can backtest with up to 12 months of data through any 12-month window.

The reason using the most recent three months of data is recommended is that volatility is very fluid and changes over time. Therefore, the results of backtesting on price history more than three months old will likely not be very useful when evaluating a stock for trading. If you are new to the system, you may be interested in seeing how the system would have performed during a specific window of time, but those results should be viewed more out of curiosity than as relevant to present-day trading.

Once you have settled on a date range and downloaded the OHLC price data, you will set up the Cycle Parameters for backtesting. You will be testing various combinations of Cycle Series Numbers, Shares Per Series, and Trade Range. You may have a favored Cycle Series, or you may want to use the System Default of 1,2,3,4. Choose the Shares Per Series number; 100 is a good starting point because it makes the share amounts easy to follow. Keep these two parameters the same over several backtests, as the Trade Range has the most impact on profitability.

Setup makes it simple to select a Trade Range to test. The Daily Move is calculated for you, and it is a solid Trade Range to start with. As you become more experienced with the Tactical Trading system, you will become more comfortable adjusting the Trade Range using the multiplier feature.

You have several additional options to add to the backtest. These are:

Auto Trade Range:

If this option is selected, the Simulator will recalculate the Trade Range at the end of each Cycle. This recalculation honors the multiplier used, if any. This is a useful feature to turn on because the Daily Move can change over time and will keep the system in sync with changes in volatility as the Simulation moves through the price data.

Honor Gaps At Open:

Price gaps at open are not uncommon. This feature checks whether more than one trade could have been filled within the gap and executes the additional trades as required. This feature is also available when live trading and String Cycles is active.

Hold If 3 Losses In A Row:

In the system, a Loss occurs when a buy or sell short order is filled. A Hold means that any further Loss transactions are Held (not executed) until a Win (sell or buy cover) transaction occurs. The Hold is then removed and the Simulation continues normally.

Using this feature prevents the system from executing additional Loss transactions that can cause large share accumulation and very long Cycle Series build-up. In live trading, this feature is highly recommended, as the third loss in a row often coincides with a percentage loss that would likely trigger a protective Stop Loss if trading manually. This feature remains in effect for the duration of the Simulation.

Hold If X Times Invest:

X is the amount over Initial Invest (the first trade in the current Cycle) used to trigger this feature. The default is 2 times Initial Invest, but this number is user adjustable.

This is a common-sense feature because the total amount invested must be controlled to prevent excessive Loss transactions. If the Initial Invest to open the Cycle is $100,000, and the next Loss fill would bring the total invested above $200,000 (2X Initial Invest), then it is prudent to place the Loss on Hold until a Win transaction occurs. Smart risk management is essential in any trading system.

Use Turbo Mode:

In Simulation there are three run modes: Run Sim Full, Run Sim Cycle, and Run Sim Trades. The default behavior for all three is to run trade by trade.

Turbo Mode is not available in Run Sim Trades.

If Turbo Mode is turned on, Run Sim Cycle will pause only at the conclusion of each Cycle, and you will be prompted to Run Next Cycle.

If Turbo Mode is turned on, Run Sim Full will simulate the full data set without stopping. Once you are comfortable with the system mechanics, it is likely that you will use Run Sim Full in Turbo Mode most of the time.

Once the Cycle Parameters have been selected and confirmed, you are ready to run the Simulation. At the top of the Simulation page are three run buttons:

Run Sim Trades:

This option pauses after each trade is executed. It is recommended if you are new to the system, as this mode allows you to look under the hood and examine each trade.

Run Sim Cycle:

Clicking this will run Cycles one at a time, pausing briefly at each trade execution. When a Cycle completes, the Simulation pauses. To continue, click the Resume Sim button.

Run Sim Full:

This mode runs through the entire data set, pausing briefly at each trade. It is highly recommended to turn on Turbo Mode for this run method.

Each of the three run modes will terminate when the end of the price data set is reached.

Profit per Cycle and total profit summed across all Cycles are displayed in the data tables. A printable report is also available.

At this point, you can start over with a new stock or run the Simulation again using updated parameters.