Trade System Evaluation by Donald W. Pendergast Jr.
Here we evaluate a simple trading
system that will enable you to
simulate the results of realistic
trading with a portfolio of stocks.
Evaluating your trading system
performance before you
put real money on the line is
essential to your profitability. In this article, we’ll evaluate a
simple momentum-based system
using TradeSim Enterprise, a
Monte Carlo simulation/
backtesting program that enables
a trader to simulate the results of
realistic trading with a portfolio
of stocks. Then we’ll dig a little
deeper, learning how to best interpret
the statistics, matching system
to a trader’s temperament.
A BASIC SYSTEM
A simple, daily-based momentum
system provides the basis for all
of the statistical analysis here. It’s
a moving average convergence/
divergence (MACD) crossover system,
but with the entry and exit triggers reversed. The system
enters at the next day’s open after a buy signal, and it exits at
the next day’s open after a sell signal. No stop-loss is used.
Only long entries were taken, and no margin was used in
testing. All key portfolio trade parameters are listed later in
this article. This system is included with TradeSim.
BACKTESTING, MONTE CARLO STYLE
Portfolio backtesting is the only practical way to obtain
realistic trading system test results, especially if you trade a
variety of stocks (futures, mutual funds, and so on) at any
given time. Further, such portfolio backtesting needs to be
simulated using thousands of different iterations to ensure
that any given mix of tradables will reliably attain profitability.
TradeSim Enterprise easily automates portfolio
backtesting with its advanced Monte Carlo analysis.