Backtesting basics

I understand you, we all been there, but it is a bad decision. It is like trying to do surgery after studying a few subjects in the medicine school. Of course, nobody would allow yo to do so but, sadly enough, here nobody will stop you, but the result would be the same: the patient will die 😉

Because if you backtest another instrument that the EMINI 5 min chart, how do you know you are doing correct? with 1/4 of the course alone, very high probability you are doing the exact oppositte so, what are you going to backtest really? Your ignorance. 

And this is why while learning, the only way you have to really know if you are wrong is by comparing your reading with Al's and, because he provides his analysis with the 5 min EMINI chart, this is the instrument you have to use if you want to get your hands dirty, and know why. With any other instrument, you are plain be blind. 

I know you are not going to follow my advice, I know because I didn't 10 years ago, so just give it a try but don't get strong conclusions about any backtest until you have deep inside all the theory in the course and you have practiced enough with the EMINI, soyou can get confident on your skills. 

Good luck!

Muchas gracias, Ludo. Thanks for your insight and recommendation.

Correct me if I am wrong, but I believe I can translate the theory from the EMINI market (analysed throughout the course) into the stock exchange, or any other environment for that matter. I signed up to do the course with the intention to become a better trader - regardless of what I would trade. I understand every market differs, but I thought that Al's theory is somewhat universal.

My understanding of Price Actionis that "as above, so below". You say that I should not only focus on EMINI, but also that I should be looking at the 5 min chart. Isn't the whole idea that the theory can be extrapolated to longer time frames?

I only started my trading journey about a year ago, and all I've done was study, study, study. I am hearing your advice, but I feel like if I continue with the course I will be too overloaded with more theory, and when the time comes to replay bars, make conclusions, look for signs, and test some entries and exits I will be too overwhelmed. That is why my request to this community is: since I am going to spend the next several months looking at stocks from 2005 to now, what are the fundamental movements or signs I should be looking at?

I am simply looking for pointers from experienced traders as I want to make the best out of my time. I feel like I am stuck where I am at, with an exciting wall of spot-on knowledge from The Man Al, but not enough retention to make it stick. I'd like to balance the theory with some real-life scenarios, and apart from watching daily charts, I was hoping I could also maximise my homework by backtesting some of Al's most basic signals. This seems to me to be the best way to put theory into practice. 

I hope that makes sense, and thanks again. Any help will be much appreciated.

Posted by: Axel Shaw

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Correct me if I am wrong, but I believe I can translate the theory from the EMINI market (analysed throughout the course) into the stock exchange, or any other environment for that matter.

Absolutely!

Posted by: Axel Shaw

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I understand every market differs, but I thought that Al's theory is somewhat universal.

Yes, PA is the same in every instrument and time frame.

Posted by: Axel Shaw

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You say that I should not only focus on EMINI, but also that I should be looking at the 5 min chart.

Yes, while you are learning from Al because this is the instrument for which he shares the analysis. Had he chosen any other, we should have gone with it.

Posted by: Axel Shaw

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Isn't the whole idea that the theory can be extrapolated to longer time frames?

Of course, but only after you have learnt to do it in a given time frame and you only have feedback in the EMINI 5 min chart. 

Posted by: Axel Shaw

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I only started my trading journey about a year ago, and all I've done was study, study, study. I am hearing your advice, but I feel like if I continue with the course I will be too overloaded with more theory, and when the time comes to replay bars, make conclusions, look for signs, and test some entries and exits I will be too overwhelmed.

I am just saying that if you want to practice, do it with the EMINI 5 min chart so you can get feedback. Learning is not only about getting good explanations, which the curse does, but also about getting good feedback and, in a massive online course like this, Al provides it by sharing his analysis of the EMINI. As long as you don't compare your reading with his, no way you can know if your understanding is correct, and that is why there is nothing to backtest. If I have to do surgery after 1-year of training, I don't need to backtest to know the poor man will die.

Do what is better for you but just bear this in mind: use some of your scarce time comparing your analysis with Al's. You won't regret it! 

Posted by: Axel Shaw

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since I am going to spend the next several months looking at stocks from 2005 to now, what are the fundamental movements or signs I should be looking at?

I can't help with that, maybe you can go to the telegram group ( https://t.me/+l3drbT3kYGc2Mjkx ) or the discord channel and ask there...

Thanks again, I really appreciate your guidance. Your answers have given me enough to work for the time being.

Kind regards,

Axel.

Hi Axel,

You can apply BPA to any market, people will advise you to start with ES E-Mini so that you can compare to Al's EOD materials and get feedback from other people faster. It's also a very good idea to sim trade while studying so that the theory gets put into practice and you get used to how the markets move. The best simulators are those where you can load in the historical data and it replays it as if in real time and let's you place trades in sim account. Or you can speed up the replay as necessary (but not too much). Software like Ninjatrader allows you to do this, for example. This is one form of "backtesting". You take a strategy and manually trade the historical data to build the skill.

Daily candles are fine, however, you may grow old before becoming rich trading such because on such big timeframe you'll need to reduce your position size greatly to not risk more % of account than on any regular trade and then it may take days or weeks before the trade finally completes. So you may be successful but earning the same amounts, only much slower. 

I would advise against using any sort of AI to trade BPA. Mainly because it won't help to solidify your own trading skills (also most AIs don't trade successfully or they wouldn't be offered for a cheap price online).

I do understand that you want to take Al's most easiest strategy and let it run automatically. I would really advise against it, BUT, I myself enjoy coding trading strategies so... if you give it a try, make sure to backtest thoroughly as there are a lot of traps that may give you false sense of hope by looking good but failing on live data. There are whole books devoted to the subject, for example on my shelf there are currently:

But you already have plenty of study from Al's material as is 🙂

I suggest to practice swing setups like H2 pullback to MA in strong bull trend (or L2 in bear trends). And study up on breakout trading. Look for Al's descriptions of what are the highest probability trades that are good for beginners and practice those manually. 

Hope this helps and let me know if you want to discuss more.

Sincerely,
CH

Hello, CH.

Many thanks for your tips - they all make sense to me. Honing my skills manually before thinking about automating seems wise.

For now, I'm going back to my course and focusing on finishing it all before starting to trade. I love your idea of paper trading the strategies I come across in the course (while doing the course) - great tip. I'm using TWS, and they offer paper trading. The only bummer is that because I live in New Zealand, the time zone for Emini does not work out.

As I said in the OG post, I am looking at practising in the Hong Kong market, although Forex could be a good option too (both for scale and time zones). Where do you recommend I start? Realistically, I can't see myself day trading on Emini due to where I live. I know Al's course is ideal for that environment, but I will have to find an alternative.

Thanks again,

A.

Hi Axel,

You'll probably end up trading only the market of your timezone eventually so you'll need to become familiar with how it moves at what time of the day etc. If TWS allows to sim trade historical replay of your market that's the best practice. But Al provides so many resources for E-Mini it makes it easier to study and review, for example, sim trade a historical day in E-Mini, then compare to Al's EOD red/green box setups to see if you got them right. Also so many people trade the E-Mini it's easier to discuss with others and compare charts. If you can somehow practice both that's probably best. But eventually your home market is going to be the one you should be familiar with best. 

Price action concepts is the same in all markets, but things like time of day may affect when swings begin differently in different timezones, the range of days, whether the market likes to swing more than trend etc. Different groups of people and algos sit in different markets so which patterns dominate will be slightly different (even though how price action itself will work will be the same).

Good luck!

Thanks again, CH.

I might end up going straight to trading (not simulating) as Al suggests. I think I'll lie to myself like he did when he was Sim trading, so I'll look into getting a certain amount of low risk trades to practice and hone my skills and experience how it really feels to trade.

Having said that, I'm only about 1/4 into the whole course, so I'll stop asking for now. I'll have a better idea once I'm done. In the meantime, I'll see if Al's theory applies to longer time-frames and Stocks / Forex (I'd assume that, despite certain differences, overall I can greatly benefit from following Al's Price Action analysis). With the fractal nature of the charts, I'm hoping that I could apply his theory into swing trading (please correct me if I'm way off!).

Kind regards,

A.

Wanting to take a little of BPA and trade it successfully while learning the rest is actually a very common trap for beginners. The reason it's a trap is because if it was possible you, or anyone else, won't ever need to do more. Simply continue trading the same few pieces but with larger and larger positions until becoming insanely rich. The reason this doesn't happen is because BPA is a holistic methodology. There are no patterns/setups that can be taken out of context in isolation and be traded successfully. Price action is in a way fractal like the charts, and multiple layers often need to be considered simultaneously when analyzing a chart. So covering only 1/4th of the course won't be enough to see the whole picture. It may be a good idea to continue sim trading but with live data to apply price action concepts you're learning and to get a sense of how the markets move in real time, but without risking real money. There's just no point in risking real funds given the low chance of success until having covered the whole course. How to handle emotions and psychology when real money is on the line is usually the next step after finishing learning all the theory.

Apart from what Carpet has already mentioned I'd like to add that If you are in an emini incompatible timezone (so am I) you might wanna look at trading london session. Which gives you forex and Dax, ftse100/uk100 (indices)

What I have seen is that with forex, the main volatility is not limited to one session. Sometimes the pair would make its major move in one of the 3 sessions and rest 2 sessions would be just a small range, it's not an issue if you find trading that as good as trends. I personally like trending markets.

With indices the positive point is that if you choose a london session index it would almost always make its major moves in its session(even though it trades 24/5). In addition you can use Al's opening patterns with indices (BOM, 18bar, gap openings). With forex such patterns are not that clear.

Here's a site which can be helpful to check on forex/metals session volatility:

https://marketmilk.babypips.com/

For checking how is an index's volatility sessionwise(or even hourly) I refer to: 

https://take-profit.org/en/volatility/indices/dax30/

(all major indices are available.)

Edited: I refered to london session because I use that one. If Tokyo session is more preferable to you then I guess the major indices would be either Nikkei225 or Aus200, HK50 is also there but if I remember correctly it trades for a little less time so less bars.

If use CFD to trade the index such as HK50, need to take into account of the spread, I use capital for CPD trading, and found it difficult to scalp since the spread is 7 pts, both way will be 14 pts.  I use CPD for learning, trading very small (advantage for CFD) and trade normal size using my broker on futures.

HK50 morning session is from 9:15am to 12pm and 1am to 4:30pm (HK time), so the trading hours in total is good.

True, when it comes to CFD you have to pay attention to spreads. I have tried quite a few brokers and amongst the ones I tried, ICmarkets and admiral markets had the best spreads. you would have to try a few brokers to see which ones are compatible with your trading style and provide the platform that you like (Metatrader or ctrader or a broker's own). Within a broker also they provide different types of accounts to suit different types of trading styles.

So quite a bit of hit and trial required before you settle down on a broker and market and trading session combo. 

I'm so glad I keep on asking questions. I thank you and everyone for your patience and guidance towards this noob 😉

What you say makes a lot of sense - thanks for being frank about it. As I progressed with the course I started asking myself: "Is it worth following this since I won't even have access to Emini?" I am realising that BPA is a very niche strategy and it made me wonder if putting the time into the course would even be the best thing for me.

Don't get me wrong, I am absolutely loving the course. Plus I just like Al as a person, with all his experience, knowledge and honesty. I also feel very supported by the BPA community. I was hoping I could use this course and translate it to other environments. Judging by some of the answers, it looks like this is the case.

I'll take your recommendation and finish the course. I might have gotten ahead of myself, so thank you for your warnings. I agree that paper trading live and applying the theory seems to be the best option for me.

Kind regards,

A.

Hi Axel, I read your message by chance. Where in NZ are you? I'm in Auckland and it would be great to connect with other traders. Cheers