One of the benefits of systematic trading is the ability to do a full and rigorous backtest. Those of us without a programming background may feel very intimidated by the prospect of coding our own systems to be tested, and may also feel that the cost of hiring a programmer to code it for us is too high.  Not so…

The familiar saying “Plan Your Trade, Trade Your Plan” can only truly be followed if the plan is reduced to a set of rules. I believe that one of the biggest mistakes an aspiring trader can make is to begin live trading on the strength of a “visual backtest”.

I’ve heard certain FX gurus suggest that we can perform a “backtest” of our strategy by eyeballing a chart and finding places in the price history where our strategy would have worked. WRONG! A true systematic backtest will expose the situations where our system WILL NOT work, and what type of drawdown and/or losing streak would have been experienced.  This is far more valuable.  Remember that amateurs will focus on the reward, while professionals will focus on the risk!

Visual backtesting is a perfect example of two system development biases.

From Van Tharp:
”
Law-of-small-numbers bias: People tend to see patterns where none exist, and it takes only a few well-chosen examples to convince someone that a pattern has meaning. When you combine this bias with the conservatism bias (below), you have a very dangerous situation.

Conservatism bias: One you believe you have found such a pattern and become convinced that it works (by means of a few well-chosen examples), you will do everything you can to avoid evidence that it does not work.
”

Visual backtesting fits this description to the letter. We find a entry signal or setup which believe should be profitable, look at the price history to find a few good examples of it working, and consciously or subconsciously ignore the periods in the price history where following said strategy would have been disastrous.

NO VISUAL BACKTESTING allowed! Learn to program, or learn to write down your rules and pass them to a competent programmer for rigorous testing. This is a research and development expense, and it is far more cost effective than letting the market show you that your strategy is not a winner by draining your trading account!