Back testing and optimization

Carlos Lontro
Oct 20, 2017 · 4 min read

Hi everyone,
After a long starting phase of back testing developing and tweaking strategies and a lot of hours gathering data, analyzing results it is now time to optimize.
This feature allows to test one strategy with different settings. In my case I focus on lot size and time frame. The good part of extensive back testing is that you will have evidence and a database of results that will back up your conclusions. For my case and my strategy it is clear that trading more does not mean making more profits, quite the opposite. Lets start with EURGBP for the last 12 past months.

Trial #1 executed 3.867 trades resulting in a profit of 4.040$, a 20,2% return of investment with a 9,68% draw down, the respective reward to risk ratio is 2,09.
Now lest look at trial #3. It executed 509 trades resulting in a profit of 6.313$, a 31,57% return of investment with a 12,16% draw down, the respective reward to risk ratio is 2,6.
And at the other opposite end of the test, let’s look at trial #16. It executed only 28 trades resulting in a profit of 10.699$, a 53,50% return of investment with a 21,69% draw down, the respective reward to risk ratio is 2,47.
The overall risk (lot size) can be reduced down or increased up in the right proportion to reduce or increase profits and draw down. The reward to risk ratio is our key and leading indicator number to look at. For example on trial #16, I could double the risk (lot size) and achieve 107% return but with an expected draw down also double.

On this particular pair and testing period of the last 12 months we have better results with the same risk but trading wider periods.

Now let’s proceed with another 2 pairs I particularly like and trade, AUDUSD and NZDUSD.

I have previously written about Markowits efficient portfolio and how it can help optimize the ratio of assets you want on your portfolio for better results based on past performance. Diversification and uncorrelated assets reduce risk and this is what I will illustrate on the example below.

Picking the top performer of the optimized settings on each pair into one portfolio, considering a degree of uncorrelation of the 3 pairs there is fewer probabilities for the 3pairs hitting their top draw down all at once. A 75% factor is estimated for the combined final draw down and we can assume these final results for this tested portfolio.

Starting Capital at 01–10–2016: 20.000,00$
Ending Capital at 01–10–2017:_ 31.349,31$
Profits: ______________________ 11.349,31$
Return over Investment: __________ 56,75%
Maximal DrawDown: ___________ 5.758,38$
Maximal DrawDown: _____________ 25,94%
Reward to risk: _____________________ 2,19

Wish you all the best

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Past performance is not indicative of future results. Trading on margin can result in losses that may exceed your deposited funds. Please ensure you fully understand the risks or seek investment advice if necessary. Any analysis, opinion, commentary or research-based material contained in my posts/blog/articles are for information and educational purposes only and not intended to be an offer, recommendation or solicitation to buy or sell. The research does not have regard to the specific investment objectives, financial situation and needs of any specific person who may read/receive it.

Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. The possibility exists that you could sustain a loss in excess to your investment and therefore you should not invest money that you cannot afford to lose. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.

Any opinions, news, research, or other information contained on this website is provided as general market commentary and does not constitute investment advice. ESIR Investors will not accept any liability for any loss or damage, including without limitation to, any loss or profit, which may arise directly or indirectly from use of or reliance on such information.

Written by

Hi, I’m Carlos. A Popular Investor @eToro -> ESIRInvestors; and Asset Manager & administrator of ESIR Investors Community on FB.

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