Adrian Reid shows how loading all trades on day one in backtests creates misleading results. He recommends running multiple backtests that randomly skip entry signals, then applying Monte Carlo reshuffles to the equity curve to see the range of possible outcomes and avoid overconfidence in your system.
So imagine you've got a system that has 20 trades, and imagine that you take a single backtest from the start of time to now, and you get a single equity curve, and that looks amazing. But right on day 1, you get 20 signals and you fully load up. That then determines when capital becomes available for the next trade, because those 20, those initial 20 trades open until they get an exit signal, and when they get an exit signal, then there's cash in the account for the next trade to come along. So that first set of trades determines a whole lot about the future path of your backtest. So if we have— if we run many backtests where each time we're randomly skipping a certain number of entries and allowing other entries into the portfolio, we can get a whole range of different paths in the backtest. And I think the more we do this, the better, because that one single backtest can be highly misleading. I mean, all you have to do is run a Monte Carlo reshuffle on the equity curve from a single backtest to see how wide the range of outcomes could be. If you add a random skip and run an optimization to force that, that backtest to run multiple times, you're going to get lots of different ranges of outcomes, different performance stats, and it'll tell you a lot about the path tendency and how, you know, just how much the performance could vary. So I think this one is really, really powerful. If you want more trading tips from Enlightened Stock Trading, make sure you give this video a like and follow Enlightened Stock Trading so you don't miss the next video. And go to enlightenedstocktrading.com/free to get your free Trader Acceleration Bundle to start improving your trading results today.
