Use Fixed Lot Size In Backtesting!!! | Forex Factory

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Use Fixed Lot Size In Backtesting!!!

  • #1
  • First Post: Dec 17, 2006 3:22am Dec 17, 2006 3:22am
I use a simple money management method in my trading, which requires that I always use a stoploss, and that my trading size is always supported by a fixed amount of money. For example, I’ll only trade 1 standard lot if I have at least $10,000, and 1 mini lot with at least $1,000, and so on. I programmed this method into my EA, and did some backtests over the last three years data. The results were fantastic, and authentic as well, since I manually checked every one of the 600+ trades meticulously. I was overjoyed with the prospect of becoming a millionaire in less than 5 years.

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Then I divided the data into 3 parts by trading year, and did the tests again. This time I noticed sth unusual. The 1<SUP>st</SUP> year’s profit was 18 times the original capital with a relative drawdown of almost 60%, the 2<SUP>nd</SUP> year’s profit quickly dropped to only 1.5 times the original capital, the relative drawdown also dropped to around 40%, the 3<SUP>rd</SUP> yrs testing showed more or less the same result.

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This looked like curve fitting to me. Backtesting found the best possible set of parameters that goes with my variable lot sizes. Although the result looked fantastic, and every trade really could have happened, but the chances that it’ll happen again are indeed very slim.

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I’m retesting my system with 1 standard lot size. The result won’t be as fantastic at all, but I’ll have more faith in it. I’ve wasted many hours doing backtesting that only gives misleading results. I hope others won’t make the same mistake as mine.

<o> </o>

Happy trading and backtesting. J

  • #2
  • Edited 6:52am Dec 17, 2006 5:41am | Edited 6:52am
Could your results have been misleading, because of your lot size?
If you were to trade with a set lot size like 1 lot, the first years, (if your method is profitable) you would have very high returns. Then the second year using the same lot size on a larger balance, even though your method is profitable, it cannot effect the balance as much so your equity curve starts to taper off to flat. then each year after that, because the relatively small lots size can influence the balance less and less, Your curve approaches absolute flatness. It would look something like like this.

So, It is not the backtesting, but the fact that your trade becomes less and less effective.
Attached Image
  • #3
  • Dec 17, 2006 6:01pm Dec 17, 2006 6:01pm
Hi,

You've taken some good steps in backtesting.

In summary
Yr1 18x, 60%DD
Yr2 1.5x 40%DD
Yr3 1.5x 40%DD

So most of the money was made in Yr1

It would be interesting for yourself to look into 'why' Yr1 was so profitable compared to Yr2 & 3.

Also, try optimizing on Yr2 and use the paramters for Yr1 and Yr3
And try optimizing on Yr3 and use the paramters for Yr1 and Yr2
See if there is any consistency between the results.

Personally I would have preferred a set of parameters that gave 4x 30%DD on each of the 3 years as an example.

I'm not sure how much trading you have done with real money. I would suggest that 60% is on the high side. If you start with 10,000 and your balance ended up at 4,000, would you have the emotional strength to continue? what if it became 3,500 or 3000 or 2500??? ... because there is a probability that market may have changed since you started trading and the system 'could' continue to lose 'x' amount before turning the corner and you 'may' not get back into profitability for a while with a 60%DD

A 60%DD means you need to more than double your account to get back to your high point. 'IF' the 60%DD happened at the end of year 1, according to your results, it would take yr2 and yr3 to get back to your high point of year 1. Can you see yourself doing that?

Best regards
Alan
  • #4
  • Dec 18, 2006 2:16am Dec 18, 2006 2:16am
Quoting smjones
Could your results have been misleading, because of your lot size?
If you were to trade with a set lot size like 1 lot, the first years, (if your method is profitable) you would have very high returns. Then the second year using the same lot size on a larger balance, even though your method is profitable, it cannot effect the balance as much so your equity curve starts to taper off to flat. then each year after that, because the relatively small lots size can influence the balance less and less, Your curve approaches absolute flatness. It would look something like like this.

So, It is not the backtesting, but the fact that your trade becomes less and less effective.

Hello Smjones! thanks for your reply! If I were trading with a set lot size I'd completely agree with you. as profit accumulates, yearly return with a set lot size will get less and less significant. however I was only saying that you should backtest with a fixed lot size. because that gives you a more accurate idea whether or not a method is profitable. so I'll strongly recommend the use of fixed lot size in backtesting. but not in real trading. once you have confidence in a method, you should of course have a method that increases your lot size as you make more profit. and hopefully, this will give you better returns. though it often brings larger drawdowns as well. it's a dilemma I'm still trying to solve.
  • #5
  • Last Post: Dec 18, 2006 2:26am Dec 18, 2006 2:26am
Quoting firehorse
Hi,

You've taken some good steps in backtesting.

In summary
Yr1 18x, 60%DD
Yr2 1.5x 40%DD
Yr3 1.5x 40%DD

So most of the money was made in Yr1

It would be interesting for yourself to look into 'why' Yr1 was so profitable compared to Yr2 & 3.

Also, try optimizing on Yr2 and use the paramters for Yr1 and Yr3
And try optimizing on Yr3 and use the paramters for Yr1 and Yr2
See if there is any consistency between the results.

Personally I would have preferred a set of parameters that gave 4x 30%DD on each of the 3 years as an example.

I'm not sure how much trading you have done with real money. I would suggest that 60% is on the high side. If you start with 10,000 and your balance ended up at 4,000, would you have the emotional strength to continue? what if it became 3,500 or 3000 or 2500??? ... because there is a probability that market may have changed since you started trading and the system 'could' continue to lose 'x' amount before turning the corner and you 'may' not get back into profitability for a while with a 60%DD

A 60%DD means you need to more than double your account to get back to your high point. 'IF' the 60%DD happened at the end of year 1, according to your results, it would take yr2 and yr3 to get back to your high point of year 1. Can you see yourself doing that?

Best regards
Alan
thanks, Firehorse. I'm doing more or less what you have suggested here. I also like to see a fixed-multiples-return of my original capital each year, with smaller drawdowns preferably. but so far it has proved very difficult to do, the best I got was still a 53.6% drawdown. though the risk can be significantly reduced if I double my traidng capital without increasing the lot size. but it would mean making money much more slowly ... everybody knows greed is a bad thing. but still it's so hard to let it go :-).

my trading experience is very limited. I've spent most of my time developing trading methods instead of really trading :-). but it's changing now, I've opened a real account with a small amout of money to test my strategy. I believe I have a good system, but I won't be sure until I see it work in real market, and bring me the expected returns.
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