Hello this is Mark from
Tradinformed.com welcome to this video
on backtesting a trading strategy using an ATR trailing stop
so on the screen at the moment
we have an Excel backtest
and the backtest model is based on
the one from my ebook
course, How to Backtest a trading strategy using
Excel, and this is available in the Amazon Kindle Store
there is a link on the screen if you'd like more information
the model is also based
on my previous video about how to calculate a
trailing stop using Excel. OK so
the trading strategy that we are going to test
is quite a nice simple one actually, we're going to use
a random entry system and this might sound like a crazy way to
enter a trading system and it is
obviously because we have no way of knowing what the market is doing
at any time however the results will show that, surprisingly enough,
as long as you have good trade management systems in place
you can actually run a profitable trading strategy
using random entry. We will
be using the euro US dollar pair
on 4 hour time frame for our backtest
and we're using
10,000 time periods which is just over six years worth
of historic data, OK so
this is the results page here we're using the final test I've already done
some scenario testing before recording this video
and the final one that I want to do today is using an
ATR multiplier. And while i'm talking
I'll just get this running, okay so
you start to see as I'm talking here
that these numbers will get filled in I'm using
a quite a simple recorded macro
to speed up the process of running multiple
backtests and you'll see that the charts here
which displays the equity curve
will change periodically as a new scenario is tested
if you have a
modern laptop or computer you find these backtests
run a lot quicker than they are doing presently on
my particular laptop. OK so
what are the advantages of using a random entry signal
as opposed to any of the myriad
other forms of technical or price action
entries we could use. Well the advantage for me
in this particular backtest using random entry
is that we can model multiple scenarios
and there is an advantage to this
what I'm doing is testing one particular value
I'm using a trailing stop and I'm testing
multiple runs, hundreds
and hundreds of different runs looking at
how different
stop-loss values were using an ATR, the average true range
and our multiplier factor of 4 in this particular case
means that every random trade entry
will automatically be assigned a trailing stop
a stop-loss equivalents to four times
the ATR, once we've run through
all these different scenarios we'll have some data
the will show how each particular
trailing stop value responds this the only scenario we're changing
everything else is random and over enough runs
we should have some data, some results that is statistically
significant and
we can see already there type who is starting to settle down a bit
we've already done quite a lot of
tests and at the moment we've got an average profit
of 54 thousand as we started with one hundred thousand so that's a
54 percent profit
the second of these is the first one of these is
profit over the six year time period the
second one of these is what is sometimes called profit factor
this is calculated by taking the absolute value
of the profit of the total
winnings divided by the total losses
of the trading strategy
we can see that in this scenario in the scenarios that I've tested
it is highest when we're using a tight stop-loss
a stop-loss of just 1 times the ATR
in seeing these later ones it is not much greater
than one, however we still have quite a high
profits 56
we've got quite a high profit
56 percent profits
over the time period. This is pretty
respectable the reason why we getting a low profit factor
is because really because of the calculation this is an
average of all the different scenarios it is the
mean average of all the profits factors
but it's not taking into account is the
times when the strategies is really profitable
so you get make in these
higher ATRs, higher trailing stops
we will likely to get, or much more likely to get very high profits
whereas when we look at the tighter trailing stops
could well be more consistent but we're going to make
lower maximum profits
And it has just finished the run there, now we can say that
the results are pretty consistent really over the three
ATRs in the trailing stop
just using a random entry over
50 tests each of somewhere around 500 trades for each
we're having a lot of trade entries here, we certainly could do more
and these results will no doubt change
again however we've got something at the moment that is quite well
quite reasonably statistically significant
and to my satisfaction proves that
trailing stop is a good way to
close a trading strategy
under the using the EURUSD as an example under the
four hour and the subsequent videos that I'm going to record
look at seeing if we can improve this profitability
by using technical analysis
using technical indicators and price action to
get better trade entries
if you'd like more information about using Excel to
backtest trading strategies and about the financial markets
and economics in general, please go to
www.Tradinformed.com