I recently engaged in an interesting chat with a novice trader this weekend. It got me thinking about the fallacy of backtesting and why I don’t rely on past statistics.
You heard me correctly. My take on backtesting is controversial and puts me in the minority. Some have called me an idiot for this view and I don’t mind at all. The majority is often wrong, and I’ve made a career out of going against the grain.
Here’s the conversation that illustrates my point.
Paul, how are you doing trading breakout-pullbacks?
I haven’t traded any this year.
Why not? A few years ago you made a killing off that setup.
That was a few years ago.
Yeah, but I backtested the past 10 years and they have a 58 percent win rate and average gain over 7 percent on winners.
Nice stats but they don’t apply to this market.
Stats don’t lie Paul.
Have you made any money this year trading breakout-pullbacks?
The take away from this chat is that you need to understand the current market you are trading. Backtesting can give you a general idea of how reliable a setup is, but there is much more to trading a setup.
You can not test for every variable and different market reacts differently to specific setups. A successful swing trader must understand the current market and adapt accordingly.
Forget about backtesting, understand the current market conditions, and trade right setup for the right market.