The Evaluation and Optimization of Trading Strategies, 2nd Edition

CHAPTER 8

Preliminary Testing

We have now completed the first stages of strategy development—its conceptualization, design, specification, and scripting in a testable form. Now, all of this work must be verified. In other words, we must now confirm that all of this code works correctly and as intended and that it is consistent with your trading strategy.

The second stage of the strategy development process is the preliminary testing of the trading model. This round of testing accomplishes five things. The first three are more concerned with scripting issues. The last two provide preliminary insight into performance.

Preliminary testing will:

1. Verify that all of the formulae and rules are calculated correctly

2. Determine whether the formulae, rules, and their combinations behave as designed

3. Confirm that the trading strategy is performing consistently with theoretical expectations

4. Provide a preliminary estimate of profitability

5. Give preliminary insight to its robustness

Robustness is an important concept in trading strategy development. In ordinary usage the term carries the connotation contained in its formal definition. The same sense applies to a robust trading strategy.

The New Oxford American Dictionary provides the following definition of robust for processes, particularly economic ones: “Able to withstand or overcome adverse conditions.”

This is particularly apropos when applied to the concept of a robust trading strategy. For the robust trading strategy is that which ...