Simulated Market Testing

"Professional traders test their systems
in near live market conditions."

The reason traders test in simulated live market conditions is obvious. They want the results to be realistic i.e. to reflect what would have been likely if they had traded the system live, day by day throughout the time period in question.

That is why it is essential to include as much accurate detail as possible - your software will introduce it at the point it would have occurred in live trading.

Why is this realism so important?

You are going back over past history when you test your systems (the process is often referred to as 'back testing'). So why take too much trouble over past history?

Because you want to see how your system would have coped.

In the test, you want your system to be faced with all the events that would actually have arisen in live trading, like:

• Running short of equity
• Price slippage
• Contract expiry
• Erratic price movements

Trading a day at a time, across the whole range of commodities on your list, you will be faced with decisions about which trades to make if you can't make them all.

Depending on your risk management policy, you will also have to choose between competing signals when they arise.

The only way you will be able to assess the competence of your system and the likely effects of different strategies is by taking this realistic approach.

You are not seeking particular results and you are not assuming that past events will repeat themselves.

You want to know if your system 'knows how to trade' and if it is capable of trading in line with your limits for risk and % return.

If this all sounds very complex - don't worry! Once you have selected software that operates to professional standards, you can rest assured that all the intricacies of simulating live conditions will be handled for you.

As a systems trader, you need to have confidence that you can delegate your routine daily trading to your computer - without being tempted to interfere.

 

Modus Trading
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Copyright David Bromley 2006
All Rights Reserved.