Backtesting and Trader Psychology, Part 2 of 2
Last Thursday I made the case for the upside of backtesting in the first part of this series about…can you guess it?… Backtesting!!! (Background noise of “Yea!!”)
I discussed, in that post, the benefits to a trader’s psychology when they regularly backtest their theories and ideas. Today, however, I’d like to take the opposite side of the debate and discuss the possible detriments.
Though I will probably always recommend backtesting as a safer way to begin the learning process of trading I do understand that it has its drawbacks for certain people and in certain conditions.
Backtesting can raise a student’s resistance level
There is a certain personality type out there that I like to call “Options People”. These are people who like their options open. If they think to backtest an idea then backtesting is the Best Thing EVER!! If someone tells them to backtest, however, they mentally shut down. Doing anything they’re told to (the dishes, yard work, you name it) constricts their willingness to comply and creates an emotional block to that chore, even if logically they know they should or on the surface they really want to do it. I’m well aware of this resistance because I live with it every day. I’m an “Options Girl”. I like to know that it is my choice and not my chore. The resistance created by the “shoulds” in my life have forced me to be extra sensitive to my “wants” and reframing my “shoulds” list into a “wants” list has help me overcome it, but it will probably always be something I have to stay diligent about. I simply don’t like being told what to do, even if I’m the one doing the telling.
Another way to get around this is to give the chore itself options: “You can backtest for 20m, 1h or 2hrs.” Suddenly the Options Person is willing to dig in and get it done because they’ve been given a choice in the matter, they have their power back.
Backtesting can lull a trader into a false sense of security
Because you can cram so much data into a relatively short amount of time, becoming a good backtester can seem like a success in and of itself. People who like shortcuts like to jump straight from backtesting (if they backtest at all) into live trading. That is exactly what it is like to jump from the hot tub into the snow bank. Have you ever done that?! It’s incredibly painful!!! The return to the hot tub (read: backtesting) is nice and comforting though and you quickly forget about feeling the equivalent of a thousand knives shredding through every defense racing to your core (read: devastating losses) that you become comfortable enough to trade live again (read: jump in the snowbank).
It’s a vicious cycle that will keep people in trading out of sheer stubbornness. Unfortunately, this trader doesn’t usually see profitability.
It is important to remember that backtesting isn’t the end-all/be-all in your trading education. It doesn’t figure in your emotional state while trading, economic news releases, time of day or general life conditions. I always recommend that you take the system you made successful in backtesting and do two things with it before trading it live: 1) backtest it one more time while keeping a journal of each trade and only take the trades that are available while you are and 2) then forward test (paper trade) your system before taking it live. Once you’re live – start with a tiny bit of money, 1-5% of whatever you’ve saved up to trade with.
The key is to allow yourself the time to ease into your system to make sure it is really working for your individual makeup.
Backtesting can feel like “just one more thing.”
We’re all strapped for time, energy and resources and it can be difficult to keep adding “one more thing” to that list. It can be overwhelming. For many, the mere mention of having homework on top of everything else they juggle makes them want to gag.
Getting involved with an accountability team/partner can make this more of a competition that you want to train for. Or, if you’re goal oriented, you can take that larger goal (backtest a year’s worth of data) and chop it up into smaller goals (backtest a week’s worth of data) and see how many of those smaller stepping stones you can get to by the end of the week or month.
The other possibility is to simply give yourself permission NOT to backtest. Take it off of your plate. Then see if the reverse psychology sets in…that simple trick works for a lot of people.
Of course the list of benefits and detriments can really go on and on. People respond so uniquely to the idea that there is a maze of reasons to backtest or not to backtest to navigate.
But I do think it is important to think about where YOU fall in the spectrum and tune into what stimulates you to do what you want/need to do for your trading education. That is the trick to everything in life…simply to understand what gifts YOU bring and working toward your purpose, as opposed to assuming that the answers are outside of you…just waiting to be discovered. You DO have what it takes to trade profitably, you just have to have the guts to own it and then capitalize on it and you’ll get there.
What do you think? Is there something you thought would be on this short list that’s not?
Triffany Hammond helps traders of all levels, gain the tools, resources and guidance necessary to build on their strengths and work around their weaknesses so that they can make the best possible decisions for themselves in the Forex Market. Triffany is a regular speaker and contributor at 
It should also be noted that when trading the longer time frames (4HR+), backtesting plays a much smaller part, you can backtest years and years of data and still find it hard to hold on to trades for 1 month + sometimes more, on these levels, live trading is where you can see all the problems and mistakes that you cannot see during backtesting, political changes, economic changes, reports, news, market sentiment changes, huge retracement candles that scare the life out of you … all these are powerful movers and can change your thinking within days only for you to discover new news some 2 weeks later which brings your trade back on course … or not !!! Doubt after every move on the longer time frames is the biggest enemy and backtesting does little to help. grrrrrr !!!!
I also think that trades made during backtesting often carry the “I’ll take this trade and watch the next candle” syndrome … something that cannot be duplicated on a live account, and after repeatedly backtesting that way, you can sometimes never really deal with that issue and when moving to live trading still find yourself unsure of whether you should take the trade despite the million trades you took during backtesting …
… the same goes for the “I’ll close this trade out early I’m in the black” syndrome (cough cough Triffany
) sometimes your system is based on closing out your trades at the final PT, not jumping out the boat at the mere sign of something that isn’t a minus sign, these are things that backtesting for some reason never seems to solve, even though in theory that was the whole gain of backtesting …. what I’m saying is that backtesting thinks it solves a lot of the problems that comes with trading and trading the system you have practised but in the end it probably only gives you a tool to work with and be persistent about till your paper/live trading teaches you the truth !!!
(That was a bit rough but that’s what it sometimes feels like no ?)
Yeah, that disparity between backtesting / demo with live trading is unavoidable I think and can be as wide as the Grand Canyon!
I don’t know if one ever really gets over it? You just become more disciplined I guess…
One challenge with backtesting is the type of system being tested – particularly discretionary systems with their levels of subjectivity. If you have alot of discretionary aspects to your trading rules that would make things alot harder especially when starting out with real money. I have alot of respect for these types of traders – that’s a whole new level of focus, concentration and discipline right there!
I think that definitely falls under that “False Sense of Security Category” as it can be easy to forget to check how many days you stay in a trade or how much drawdown you had to go through to get to your PT in your backtesting. Those are significant issues that definitely play into your psychology once live.
That’s the very reason I recommend the journals – to keep track of that and stay on top of what is really driving your trading decisions overall.
It was funny that I posted the “I’ll close the trade early because I’m in the black this week.” Someone at Tuesday’s Webinar asked me if I ever get out of trades early and I said, “Not really that often, but when I do it has more to do with where I’m at than where my trade is,” And then I met with that same scenario just two days later where I knew that I wasn’t going to be able to capitalize on my trade because my life as a Mom has taken over this week.
But, you’re right, there’s no way you can factor that into your backtesting. That’s real life being thrown at you and something you can’t really learn until you’re experiencing it.
Again…that’s why I don’t recommend backtesting as the end-all/be-all in your system development, it can’t be. But it I will always recommend it as the safest place to start.
GREAT comments! Thank you, Aby.