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Kirkpatrick’s Investment and Trading Strategies: Tools and Techniques for Profitable Trend Following by CMT Charles D. Kirkpatrick II

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2. Investment Strategies: Backtesting

In the world of trading market systems development, backtesting is the primary means of determining the optimal set of rules and results for any newly developed algorithmic system. Backtesting can be accomplished in three ways. In order of their reliability and, thus, usefulness for a proposed system, they are a single backtest, a standard optimization, and a walk-forward optimization.

A single backtest occurs when the analyst has already developed a reasonable hypothesis, usually from other tests, and wants to see if the parameters still hold. An example is shown in Figure 2.1, an equity curve graph of the profitability of my original formula for using only relative price strength to buy and sell stocks. ...

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