I have a short discussion with Dave (a.k.a MagicT). He brought up the idea of backtesting. Though It is contrary to my posting before on this topic, I feel that it is always good to have other’s opinion. And it might help other readers as well. With his consent, I am quoting my email conversation with Dave on the topic of creating a trading plan.
I have read your blog about your feeling on backtesting. I understand what you are saying. My purpose here is not to argue with you.
However, you have rightly concluded that you do not have a proper plan. I would like to help you to discover and create such a plan. For that we need a “trading plan”, which is part of the overall plan. The trading plan will be the keystone to your trading success. In order to create a trading plan, we need information. The best information we can get, at present, is our own backtesting. The backtesting will tell us a great deal, although it will not tell us if you will be successful with the system. For that matter, neither will paper trading.
I would make the case that actual money forward testing is not a good measure of the plan either, not if you have failed to backtest. The reason is this: Trading any system without having programmed its rules to test it, means that you will never have any idea if you are trading outside the plan or missing trades EVEN WHEN YOU THINK YOU ARE TRADING THE PLAN! If you miss a signal, how will you know? If you make a trade that you think is based on the plan, but you absentmindedly missed a rule, how will you know? You will only know if you test each day going forward with the same program that you used to backtest. Therefore, we must create a set of programmed rules that test our system.