Backtesting Simplified - A Clear Step-by-Step Approach

How's it going everyone? In this video we are going to cover how to backtest.

Now many people run to backtesting too early in my opinion and get pretty poor results and then give up on the idea saying it doesn't work for them.

But let's go over in this video what I find to be the best way to backtest a strategy or a model.

Now, like I said, the biggest mistake is people run to back testing too early. They get ahead of themselves. They want all the statistics.

They want the win rate. They want their risk to reward. They want the total profit. They want to see all those things.

Now, the biggest problem is they don't actually understand the model yet. So these are the steps we're going to go through to make sure that you do know the model.

And then you have a backtesting session that's actually worth your while and worth your time. So step one, we're going to learn a model.

Step two, we're going to reverse engineer the model. And then step three, we're going to backtest the model. So what does step one look like?

Well, the first thing you're going to have to do is actually have a model.

If you don't have a framework, how are you going to actually backtest and gather data that is meaningful if you're not following a strategy or a system with repeatable rules?

So you're going to want to find one model that you can follow. Now part two in this is actually understanding that model.

Are there certain concepts that you don't know within the model that you're going to have to learn? And then once you learn all of those, do you know how to put them all together?

You have to understand the framework of the model that you're going to back test.

Now before just learning the model and jumping into back test, we need to reverse engineer. Now what does that look like?

Well we're going to go ahead and open up trading view and then go to the daily chart if we're an intraday trader.

Now in these examples we're going to focus on expansion as that is what I prefer to trade.

So on the daily chart I'll find a clean expansion day,

but if you trade consolidation or some other phase of price look

for a day that you would want to trade now for me i'm going

to ask myself why was this an expansion day how did

i get that bias where did the swing form i want to ask myself

questions that's going to allow me to learn why we had

an expansion day after i've identified that i'll go to

the lower time frame or an intraday chart do i have a confirmation of this higher time frame bias where was the high or lower

a day formed, what time, what does the daily profile look like, and then I want to find a point of interest that I'm looking to trade out of on that current day.

Then I'm going to go to the entry time frame in that point of interest, and I'm going to refine it down. Did price offer me an entry?

Where could I put my stop? Where could I take profit? And what was the best way to manage it? And I'm going to journal all of that.

So essentially, I'm just going into trading view in hindsight, finding an example that worked really well, and then I'm going to study it.

And then do that over a large number of examples, and you're going to really understand exactly what you want to see when you go ahead and actually backtest your system.

So now that we have done both the learning of the model and reverse engineering of the model, that is when I will go into a backtesting software, or Tradesella, and start to actually backtest the model.

Now this is where I'm going to use what I learned in step two in reverse engineering and take trades exactly how I want to see them look.

So I'm going to repeat that process over and over, and eventually after

I have a larger series of data points or a larger number of trades, then I can make adjustments to my strategy based off that information and get practice that I can apply to the real market.

And with all of that said, let's go ahead and practice each one. We're going to skip one as I already have a video on my playbook, and I'm going to be focused on the fractal model and variations of it.

So we'll go ahead and start in step two, where we're going to reverse engineer the model in TradingView, and then we'll do step three and go over a few examples of how to backtest in TradeZella.

So let's go ahead and jump into TradingView. So here we are in trading view and we are going to go over how to reverse engineer a model.

And with this, I need you to understand this isn't you trying to test yourself whether you can catch a trade or not, right?

It's just finding an example where price did what you wanted it to and then finding where you could get an entry into that.

So let's go over this. I'm just going to look in previous price action. It doesn't really matter where. Focus on an asset that you would trade.

So here I'm on the S&P and I'm going to find a nice expansion. So just taking a look here, we have an expansion, right?

So I'm going to replay to it. And like I said, I'm not trying to test myself. Can I get a trade in here, right?

I'm just using this to learn and study trades that did work out.

We're trying to find trades that worked out in expansion days since that's what I'm focused on.

So I'm not going to replay to right here and test myself on whether or not I can find a trade in there. I'm going to let that day play out.

Let the expansion have already occurred. and I'm going to find where I could get a trade in this.

So here I am on the daily chart, step one, why did price expand this day? That's my goal to figure out.

So taking a look, we have expansion. I see a consolidation.