Wealth Lab vs TradeStation for Back Test

At the Trader’s Expo I watched portions of presentations on two different back test tools: TradeStation and Wealth Lab.   The most striking differences between them were not in functionality but in following.   The TradeStation talk in the exhibition theater area was packed, with people standing to watch.   Wealth Lab was discussed in a private room with very light attendance.

The difference in venue is not the root cause.  The (new) owners of Wealth Lab, Fidelity, restrict access to only customers trading in excess of 130 times per year with Fidelity.  If this limited access is a marketing ploy to get more active traders for Fidelity, I’d hazard a guess that its not working.

Too bad Wealth Lab is kept locked away because it sounds like it has features which are lacking in TradeStation.  Portfolio simulation, for example, is a capability often requested by TradeStation customers which is already available in Wealth Lab.

TradeStation, on the other hand, offers futures and forex which Wealth Lab does not support.  It also appeared as though Wealth Lab required more effort than TradeStation to set up the data for even basic back tests.

 As it stands, I’ve put TradeStation to work for a lot of back tests and didn’t see enough compelling capabilities in Wealth Lab to go through the pain of both switching software and lining up 130 trades per year at Fidelity.

What about you?  Which tools are you using?

Backtesting Introduction

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Click here for my Backtesting video interview at Moneyshow.   It gives an introduction to backtesting and covers two main topics:

What is Backtesting?

In short, backtesting is the process of testing a strategy by describing that strategy as a set of rules and applying those rules to historical price data.   It is often automated by using a software backtesting engine such as StockFinder or TradeStation.

Read this blog’s Backtesting Definition

How to Do Backtesting

Do it Yourself Manually

Tedious, tedious, tedious!   Error-prone too.    The plus side of backtesting manually is that you gain intimate knowledge of each historical trade by looking at it yourself.   The downside of manually backtesting is that it is so time-consuming that its not feasible to back test a large sample size

Automate with Computer Software

Using specialized computer software to do the backtesting speeds up the process considerably.   Automated backtesting is still hard work requiring advanced skills to get it right.   

Hire a Quant

This is the ideal way to get a strategy developed, analysed and backtested. It is the path taken by the large trading firms.    You will compete with them for talent, so you need to be able to pay the big bucks to go this route.

Read BackTesting Report

Backtesting Report  is the easiest, most cost-effective way to get backtesting results.   This is a report of the backtesting that I use to develop my own trading strategies so you know we strive very hard to get it right.   Offering electronic reports and video classes over the web helps keep the costs down to keep it in reach of the average trader or active investor.    To find out about specific Backtesting Reports to help you learn how to buy, sell and ultimately develop a strategy of your own, visit the Orders page.

Profit Trading: How to Choose Buy or Sell Signals

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Here’s a short interview at the MoneyShow on the topic of choosing buy or sell signals in order to profit trading and reduce risk of loss. Click here to play video

To summarize:

Before risking any money in the markets, I want to know that I have a reasonable chance to profit trading.   With that in mind while choosing technical indicators to give buy signals and sell signals, I first evaluate them by whether I think they will yield a profit trading.   My preferred method is to backtest and then publish the results in BackTesting Report.

Trying to figure out whether it’s the buy signal or the sell signal which is the source of profit when trading brings a chicken-and-egg problem.   Is the trading profit due to the buy signal or is the trading profit due to the sell signal?   One  way to sort this out is to first backtest the buy signals as independently as possible and then later backtest several sell signals using the buy signal that showed the most potential trading profit.

Backtesting Report does this by setting a timed exit, meaning that the strategy will sell after a given number of days.    This is not meant for real trading, even if it does show a profit.   It is simply to get an idea if the buy signal is any good.  

Different types of traders favor different timeframes.    To make the hunt for a good buy signal more realistic, BackTesting Report models three different types of traders and reports the win rate or percentage of profitable trades.   A timed exit of:

  • 200 days models an active investor who may hold a position for a year – potentially getting favorable capital gains treatment for trading profits. 
  • 20 days models a position trader who looks for trading profit after a few weeks in each trade.
  • 2 days models a swing trader who looks for a quick trading profit almost immediately but is willing to hold a stock overnight if necessary to ride a profitable trade.

If you already know what timeframe you prefer you can just look at the results for that timeframe.   I have also found it useful to compare win rates across different holding periods to help me decide which timeframe I want to target to maximize trading profit.

After picking a buy signal, then it is time to choose a sell signal.   The BackTesting Reports compare several different exit strategies for the same buy signal to see which results in the best potential for trading profit.   The main criterion for measuring potential for trading profit at this stage is expectancy. The different types of sell signals in BackTesting Report are in these categories:

  • Timed – as discussed above
  • Symmetric – often a mirror-image of the buy signal.  For example if the buy signal is moving averages crossing upwards, the symmetric sell signal is moving averages crossing downwards.
  • With stop losses – setting a fixed price to cut losses and sell.  Another technique is a trailing stop loss which raises the stop price as stock price moves up and trading profit accumulates.
  • With profit targets – picking a price or indicator configuration in advance to take profits

Here again it’s useful to look at the amount of time each strategy held a position and match it up to your needs.    Of course, the main point is to choose a strategy with the highest potential for trading profit.   

Along with backtesting results, it’s also a good idea to do forward testing to confirm the choice of buy signal and sell signal.

Of course there is more to learn about how to profit trading than just picking a buy and sell signal.  You need to decide how to opportunities to trade and how to keep track of trading profits and losses, for example.    Most important, is deciding how to manage risk to be sure to stay in the game and hang on to your trading profits!

For more info on technical indicators tested as buy signals and sell signals, see BackTestingReport.com

How Backtesting Helps Investing and Trading – Conf Call

 A replay of this conference call is now available on SelfDirectedInvestor.com  (updated 7/16/09)

Here’s the press release with call-in details:

Back Testing and Trading Expert Jackie Ann Patterson to be Interviewed by Self Directed Investor, Inc.

Self Directed Investor, Inc, a financial media company, today announced they will interview Jackie Patterson, Editor of the BackTesting Report, a must read newsletter for traders.  Ms. Patterson is a popular presenter at the Money Show and the International Traders Expo.
Jackie’s web site is at http://backtestingblog.com, a web-site with regular articles on back testing techniques that are useful for traders. The Back Testing web site provides several free offers including a complementary first issue of the Back Testing newsletter.

DATE: Thursday, July 16, 2009
TIME: 4:00pm ET
CALL-IN NUMBER: (712) 432-0075
PARTICIPANT CODE: 419479 

The public is invited to join the call and ask questions of Jackie Ann Patterson.
 
The weekly conference call will be available at:  http://www.selfdirectedinvestor.com/. The title of the call is “Back Testing to Manage Risk” The calls will be freely available to the public.

Ms. Patterson, said “The Back Testing Report provides solid data about the performance of objective technical indicators that helps traders pick their own winning strategy in less time, with less effort, and less risk than many other systems. I am pleased to have the chance to share the power of these indicators with listeners at the Self Directed Investor.

 “Jackie has a passion for trading and for helping others learn to be better traders.   I am looking forward to learning more about her back testing system for traders during the interview.” said Scott Nystrom, President and Editor of Self Directed Investor, Inc. 

The mission of the Self Directed Investor is to provide original analysis, timely commentary, and educational material to help inform personal investment strategies.  Topics covered at SelfDirectedInvestor.com include: trading stocks, FOREX trading, options trading, gold and energy sectors, ETFs, the economy, and income investing.

 About Self Directed Investor, Inc.

 Self Directed Investor is a financial media company, using audio, video and feature articles to empower investors through ideas and education on their web site, http://www.selfdirectedinvestor.com

 CONTACT: Self Directed Investor, Inc. 
Scott Nystrom, President 
Phone: 202-210-2101 
Email: svnystrom@selfdirectedinvestor.com 
 
SOURCE: Self Directed Investor, Inc.

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MACD Sell Signals

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If you’ve ever wondered:

  • which MACD sell signal has the best track record
  • whether to sell when the MACD Histogram ticks down or wait for the lines to cross
  • how far positions have dropped after a MACD by signal
  • whether stop losses really reduce risk
  • whether using an ATR stop is worth the effort

then you might considering investing in a copy of the MACD Sell Signals BackTesting Report.

The MACD Sell Signal Report builds on two of the MACD Buy Signals to backtest basic exit signals using MACD lines and histograms. This report gives the first look at Maximum Adverse Excursion – how far the position went against you — as a way to measure the risk of each strategy.   It also compares three different types of stop losses to reduce risk.   Read this report to find out how you would have fared by following the MACD and MACD Histogram.

 Subscribe to BackTesting Report Now or order MACD Reports separately

Gerald Appel’s “Technical Analysis Power Tools for Active Investors” – a Book Review

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4.0 out of 5 stars Reveals Widespread MACD Misconceptions – Almost, April 16, 2009

Buried in this book are clues that point to widespread misconceptions about the MACD.

The clues are
1. Hints at not waiting for the MACD lines to cross to start buying
2. A calculation of MACD Histogram that is different than most, but not all, charting websites and software
3. Suggestions on circumstances to slow down and sometimes skip MACD sell signals

Experienced traders may spot the differences between Appel’s approach in this book and what is often bandied about regarding the MACD. I think it would have been even more helpful if the author had addressed the differences and pointed out any common misconceptions directly. Having done some backtesting of the MACD, I think the book needs more specific, objective details on how to anticipate MACD lines crossing and recommendations for using the MACD histogram or Appel’s histogram, as I have come to call his way of plotting it.

I reckon that reading the book years ago and thoroughly understanding the nuances of how Gerald Appel uses the MACD would have helped me, especially in 2007. Since then, I’ve seen the value of backtesting. The good news is that many sections of this book show historical test results. However, I was a little disappointed not to find backtesting results for the MACD in this book. Test data is rarely included in trading texts so it is probably a bonus to get the data that is presented in this book.

The author emphasizes synergy and gives specific instructions for using other market-timing power tools — along with the MACD and sometimes even without the MACD. In fact, the MACD is only one chapter. But MACD is why I came to the book and I suspect many other readers do the same, so that’s where I focused most of this review.

Besides the MACD, the book has instructions on key indicators of market internals and health. It also gives rules of thumb for estimating duration and extent of market moves, using chart patterns, and it covers moving average channels.

Bottom line: Worth reading to get the benefit of the experience of Gerald Appel, the man who invented the MACD and has seen a lot more than the current boom/bust cycle.

(Backtesting Blog is an Amazon Associate.)

My BackTesting Engine Evaluation in 2007

Before starting the current round of major backtesting, I evaluated several tools to decide which to use.    This article shares the highlights of that endeavor and the main reasons for the outcome.

TradeStation was my incumbent.  By 2007 when I made my last evaluation, I’d had a couple years of experience with it as a charting tool and a backtesting engine.    I’d also used TradeStation Radarscreen to scan the market for opportunities, but found it awkward and slow.   The backtesting had proved reliable but limited to running one stock at a time.     Then TradeStation came out with two critical enhancements:  a means to read in outside data for historical prices, and hooks to automatically process more than one stock per run.

Another favorite tool is Telechartwhich has been my top-down market analysis tool since 2005.    It doesn’t have a backtesting engine.   However, in early 2007 the Worden Bros who make Telechart had just come out with the Blocks Backscanner.    I tried it out extensively and really liked the super support as well as the flexibility.   Its strength is scanning through a huge list of stocks in incredibly fast run time.    But as a very young tool, it didn’t yet have all the features I wanted like independent data sources.  Plus, it was so new  in 2007 that I often felt like a beta tester which is exciting but not what I was looking for to prove out trading strategies.    

I didn’t get past reading the specs on other backtesting tools.    Trading Blox seemed to locked into their own strategies, plus a very high price tag.  I’d previously been exposed MetaStock, struggled with it back in 2004, and was not keen on revisiting it.   I had heard good things about Wealth-Lab but didn’t want to get locked into Fidelity, and didn’t see all the features I wanted there either.

So basically my choice came down to the new Blocks or my old standby TradeStation.   I came to the conclusion that the optimal way to proceed was to rely on each tool’s strengths.    So I use TradeStation for backtesting because I can set up the large-scale, controlled software environment for it.   This gives me a way to prove out a strategy which I do only once per strategy.

Once a strategy is proven and I’m ready to trade it, I usually want to scan the market for opportunities to apply it.   I do this daily, after the market closes, using Blocks 2.0 because it is so very fast at scanning the market.

I recently attended a class on Worden Stockfinder 4.0.  It looks promising —  the Blocks program grown up and renamed.  I’ll review my impressions in another post.

(Backtestingblog is a Worden affiliate, meaning I may be compensated if you buy their product.  Blocks, Stockfinder, Telechart are trademarks of Worden Brothers Inc.   TradeStation is a trademark of TradeStation. TradingBlox is a trademark of Trading Blox. Wealth-Lab is a trademark of Fidelity. MetaStock is a trademark of Equis.)

BackTesting Tool Selection Criteria

In response to questions about choosing backtesting tools, I’ll share my experiences in the next few posts.     If you’re doing your own backtesting, its worth taking some time and effort to pick the right tool for you because you will need to use it extensively to get meaningful results.   And you risk your account equity when you trade on the results so it better not be buggy!

The first most important step when you are looking for a backtesting engine — or anything else for that matter — is to think about what you want.    Are you testing with just one commodity or across the whole stock market?   What is your budget?  How much programming flexibility do you want vs having it work very intuitively?

My criteria for this current project were:

  1. Backtests correctly.    Don’t take this for granted.   Being able to verify results and spot-check each indicator test by hand is essential.
  2. Open to writing custom technical analysis strategies.
  3. Open to reading in outside data.    CSI data tested out as the cleanest data and that is an external data source to everything but CSI’s own tools.
  4. Open to writing out calculated data beyond the scope of the canned reports.   For example, adjusting the position size based on the distance to the stop can have a huge effect on performance.   Its very helpful to be able to write out the stop placement and the size but you won’t find them in the typical vendor’s report.
  5. Computer-readable output reports.   Necessary for compiling stats and drawing conclusions from a huge number of runs.  You can get around this requirement if you can write out all the data you need ala bullet #4.
  6. Reproducible results.   Different runs of the same backtest should have the same results.   This means being able to lock down the version in use.
  7. Can run automatically through a large list of stocks.   Sadly, most backtesting engines only run on one stock at a time.  Others allow you to add on software to run multiple tickers automatically.
  8. Cost.    Personally, I’m willing to pay to get what I need so this was a lower priority.   Even so, it makes sense to choose the most affordable option that gets the job done.
  9. Familiarity.    Since I already had experience with several tools, those had the inside track in my evaluation of backtesting tools.

Those were my key selection criteria.      Before reading further, take a minute to write down what you want from a backtesting tool.

Testing the Tester

Here’s another mind-numbing task when you are doing your own backtesting:  testing the tester.

This week I was forced to do something I don’t like at all.    I had to upgrade my backtesting software, TradeStation, to a new version in the middle of a set of runs.    But when my computer went whacko, upgrading TradeStation proved to be my only option to restore sanity.

The truth of the matter is that TradeStation hangs intermittently on 2 of my machines.   The other two are fine…so far.   I’ve posted the problem in the forums, taken lots of suggestions, but nothing seems to help for long.   Eventually, TradeStation gives a client access layer error, becomes unresponsive and needs to be shut down.    This leaves 2-3 TradeStation processes running which I manually kill.    Microsoft puts up a little warning box that says terminating a process unexpectedly may cause system instability, or some such.   Mostly its just fine, but do it enough times and Whacko!    I needed to re-install TradeStation and the only version available was one level up.  

In my previous career I had the priviledge of working with one of the best software engineering teams on the planet who’s customers are the best hardware engineering teams on the planet.     Many of those teams would avoid changing versions period.   But in the middle of the project, they really shied away.   When they did upgrade, as a mteer of course, many would run their own regression tests and compare the results between the old and new versions.

For this week’s upgrade, I did regression testing and am happy to report that the results of extensive backtests matched between new and old versions.   Too bad the intermittent failure still matches as well!

Even though it tested out okay this time, there’s always the potential for bugs to be introduced in a version change.   This goes not only for TradeStation but other backtesting engines and other software as well.    This is another important thing for you to think about if you are doing your own backtesting: you need to have a controlled process for introducing new software to make sure that unexpected errors aren’t introduced.