Chapter 4. Post-Analysis
The post-analysis section is one of the key sections for backtesting. It gives the trader the "complete picture" on the trading plan that was used for the backtest. The goal of the analysis is to analyze the results for a particular backtest period. From the results and also the backtest, you can derive ways to change the trading plan in order to increase profits, increase risk/reward ratio, and so forth.
In this chapter, we take you through the step-by-step process of examining the backtest results and then begin to go through some optimization scenarios. There are many different things you can try so we do not say that we complete the optimization because that word really does not exist here. Markets change daily so there is no complete answer. We have to adapt to the market, otherwise it will eliminate us.
EXAMINING THE BACKTEST RESULTS
With the current trading plan, Table 4.1 shows the trades that we entered.
Table 4.1 shows the complete statistics for all eight trades from January 1, 2007, to January 1, 2009, for the daily time frame for the instrument EURUSD. We were profitable so that is a good first start. The problem you should see right away with this trading plan is that there was a lot of risk compared to profits. In other words the risk/reward ratio was 1.51. The goals of a trend system are to minimize losses when you are wrong and maximize profits when you are right. It matters when one loss can "overpower" more than one-win profits. With the risk/reward ...