If you were looking into trading futures, commodities, currency or stocks, you were probably exposed to the results of “backing”. These results supposedly show what the trading method would have done in the past if you had followed it. They are one of the reasons why the U.S. government requires the phrase “past results are not a guarantee of future results” when discussing trading systems or approaches.
The backs are hypothetical, and may or may not have been traded for real money. It is possible, even that it is IMPOSSIBLE to make the transactions shown in the backstory.
As an experienced system developer, in 5 minutes using my Tradestation testing software I can build a system in any market with a backstory that will impress you – it will look so good. BUT it will not work – almost guaranteed! Believe me, many developers create systems this way and then try to sell you their “secret”.
So why are backtes so unreliable? Four reasons come to mind.
1) Optimization – Most testing software has an optimization feature that selects the best set of parameters based on past data. Most developers abuse this feature. What worked best in the past is unlikely to be the best in the future. So, falling for these overly optimized backs, you think you’re buying a Mercedes, but you’re actually getting a Yugo.
2) Rear vision shifts – it is difficult to create a system without “reaching the peak” of data. Since future data cannot be read, the developer who does so during development is essentially cheating. Many times people don’t even realize they’re doing it – it can be such a subtle mistake.
3) Software Limitations – The software itself has limitations that allow you to populate unrealistic or unattainable ones. For example, systems with a market for closed orders are very likely to involve unrealistic filling, as the order can be sent after the market closes (and is never filled), but the software still believes it has been filled.
4) No real-time performance – developers publish their own backtext results, make them look real, and don’t have independent real-time results verification. Can you really trust backs from the same person who is trying to sell you the system?
What is the solution to this backteat dilemma? Just when you’re dealing with a CTA (Commodity Trading Consultant), hedge fund, or mutual fund, make sure you see real, verified real-time records. If you are dealing with a system developer, make sure the results you see are independently verified and validated, preferably with results based on real money (not demo accounts). I list two of these websites below.
It is easy to be tempted by unusual test results. Just remember that these results may be invalid.
Websites like worldcupadvisor.com or collective2.com are just two of the many websites that offer third-party trading results verification.