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Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading, + Website by Kevin J. Davey

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CHAPTER 13 In-Depth Testing/Walk-Forward Analysis

Once I have a trading system that I believe has some sort of edge to it, and it passes all the preliminary tests I throw at it, then I feel comfortable going on to more in-depth testing. As stated earlier, there are four primary ways of testing:

  • Historical back testing—all in-sample
  • Out-of-sample testing
  • Walk-forward testing
  • Real-time testing

Over the years I have successfully and unsuccessfully used each one of these approaches. Currently, I believe that walk-forward analysis offers the best combination of amount of history that can be tested, degree of match between historical and real-time results, and sensitivity to changing market conditions. During the in-depth testing phase described in this chapter, I will use only walk-forward testing. But before we get into a discussion about walk-forward testing, what if you don’t have any parameters to optimize?

images No Parameters

Occasionally, you may develop a system that has no parameters to optimize at all. For example, your entry may be based on a specific candlestick chart pattern, and your exit might be a set-dollar-amount stop-loss, with a set profit target. For whatever reason, you may decide that you never want to change these values for stop-loss and target, and you do not want to change the entry. Your philosophy may be “no optimization, ever,” which is certainly one way ...

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