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By: Markus Heitkoetter

In my opinion backtesting can be a very powerful tool if used correctly.

The problem is that many trader over-use the functions provided by the different backtesting software packages and think more is better. Many so-called system developers try to imply that the longer you backtest the better and more robust your system will be. That's not always true.

Let me use the e-mini S&P as an example. In 2000 the average daily range was 100-150 ticks per day; in 2004 it was only 40-60 ticks per day. If you backtest any trend-following daytrading system in the e-mini S&P you will see that it worked perfectly until 2002 and then suddenly fell apart. It seems that there are no more intraday trends. That's not surprising as the daily range of the e-mini S&P decreased by more than 50%.

What happened?
There are a couple of reasons. Probably the most important one is the introduction of the Pattern Day Trading Rule in August and September 2001by the NYSE and NASD: If a trader executes four or more day trades within a five business day period then he must maintain a minimum equity of $25,000 in his margin account at all times. Because of this rule made traders stopped online daytrading equities and started trading the e-mini S&P future instead.
Look at the sudden increase in volume in the e-mini S&P in the beginning of 2001:

Many of these stock daytraders used methods to scalp the market for a few penny. Using the e-mini S&P they suddenly had a much higher leverage, paying less commissions, and their methods were extremely profitable.
Unfortunately, these scalping methods kill an intraday trend almost instantly, making almost every trend-following approach fail.

Another reason for the dramatic change of the market was the introduction of the automated online daytrading strategy execution in TradeStation. In 2002 TradeStation's customers who were using this feature increased by 268%. Overbought/Oversold strategies became very popular and when the market made an attempt to trend these online daytrading strategies immediately established a contrary position.

Conclusion
When backtesting you need to know these things. It's not enough to just run a system on as much data as possible; it's important to know the underlying market conditions.
In non-trending markets like the e-mini S&P you need to use trend-fading systems, and in trending markets like commodities you should use trend-follwing methods.
And that's when clever backtesting helps you:

If your backtesting tells you that a trend-following method worked in 2000-2002, but doesn't work in 2003 and 2004 then you should not use this strategy right now.And vice versa: When you see that a trend-fading method produced nice profits in 2003, 2004 and 2005, then trade it.
I haven't yet seen an online daytrading strategy that works in all market conditions: trending and non-trending. Usually a strategy works very well in ONE market condition (e.g. trending) and produces small losses in the OTHER market condition. That's why you need to alter daytrading strategies.
And THAT'S where backtesting can help you.

Backtesting the day trading system is vital for newbie traders. Markus, the day trading expert, tells you how to backtest the right way.

Markus Heitkoetter is a 19 year veteran of the markets and the CEO of Rockwell Trading. For more free information and tips and trick how to make consistent profits with online daytrading , visit his website www.rockwelltrading.com.

Article Source: http://www.eArticlesOnline.com

Waldemar Puszkarz, Ph.D.

It is not very difficult to design a viable winning trading system for emini futures markets. Eminis, just as most other futures markets, tend to be pretty technical in nature and so elements of technical analysis can be successfully employed here to design a profitable trading system.

Trading systems can be roughly divided into two large categories: counter-trend systems and trend-following systems, although it is possible to combine the elements of both to produce a more complex system that handles more trading situations.

In some markets, such as emini futures for S&P 500, counter-trend systems can be profitable, in other markets it makes more sense to focus only on trend-following systems. Trend-following systems should work reasonably well in most emini markets, although some are more suitable for this approach than others.

In this age of electronic trading, most emini traders are involved in daytrading, taking positions for several minutes to several hours, always closing them before the end of a daytrading session, that usually is not far away to the closing time for the major US stock exchanges.

Any sound trend-following mechanical trading system that operates as a daytrading system should rest on the following three pillars:

1. it is selective (it trades at most twice a day, but not necessarily every day),
2. it cuts losses relatively short (a suitable stop-loss that is a function of the market's volatility should be chosen by testing),
3. it lest profits run.

While the last two conditions are quite obvious and are used routinely in the design of trend-following systems, the first one is usually overlooked, yet it is as important, if not even more, as the other two, in this author opinion. It is, in fact, much easier to design a profitable trading system when this condition is taken into account. This is so simply because there are really not so many good daytrading opportunities every day that could be easy to first identify and then to exploit profitably. On the other hand, when this condition is taken into consideration, it is relatively easy to find one or two good trading opportunities per day frequently enough to design a working profitable trading system.

You can find more information about eminis and how to trade them, including some simple free trading system on the author's website at: http://www.eminimethods.com

by Markus Heitkoetter

In my opinion backtesting can be a very powerful tool if used correctly. The problem is that many trader over-use the functions provided by the different backtesting software packages and think more is better. Many so-called system developers try to imply that the longer you backtest the better and more robust your system will be. That's not always true. Let me use the e-mini S&P as an example.

In 2000 the average daily range was 100-150 ticks per day; in 2004 it was only 40-60 ticks per day. If you backtest any trend-following daytrading system in the e-mini S&P you will see that it worked perfectly until 2002 and then suddenly fell apart. It seems that there are no more intraday trends. That's not surprising as the daily range of the e-mini S&P decreased by more than 50%. What happened? There are a couple of reasons. Probably the most important one is the introduction of the Pattern Day Trading Rule in August and September 2001by the NYSE and NASD: If a trader executes four or more day trades within a five business day period then he must maintain a minimum equity of $25,000 in his margin account at all times. Because of this rule made traders stopped online daytrading equities and started trading the e-mini S&P future instead. Look at the sudden increase in volume in the e-mini S&P in the beginning of 2001: Many of these stock daytraders used methods to scalp the market for a few penny. Using the e-mini S&P they suddenly had a much higher leverage, paying less commissions, and their methods were extremely profitable. Unfortunately, these scalping methods kill an intraday trend almost instantly, making almost every trend-following approach fail.

Another reason for the dramatic change of the market was the introduction of the automated online daytrading strategy execution in TradeStation. In 2002 TradeStation's customers who were using this feature increased by 268%. Overbought/Oversold strategies became very popular and when the market made an attempt to trend these online daytrading strategies immediately established a contrary position. Conclusion When backtesting you need to know these things. It's not enough to just run a system on as much data as possible; it's important to know the underlying market conditions. In non-trending markets like the e-mini S&P you need to use trend-fading systems, and in trending markets like commodities you should use trend-follwing methods. And that's when clever backtesting helps you: If your backtesting tells you that a trend-following method worked in 2000-2002, but doesn't work in 2003 and 2004 then you should not use this strategy right now.And vice versa: When you see that a trend-fading method produced nice profits in 2003, 2004 and 2005, then trade it. I haven't yet seen an online daytrading strategy that works in all market conditions: trending and non-trending. Usually a strategy works very well in ONE market condition (e.g. trending) and produces small losses in the OTHER market condition. That's why you need to alter daytrading strategies. And THAT'S where backtesting can help you.

About the Author

Markus Heitkoetter is a 19 year veteran of the markets and the CEO of Rockwell Trading. For more free information and tips and trick how to make consistent profits with online daytrading , visit his website www.rockwelltrading.com