Mastering Strategy Validation: The Live Trading Advantage
I strongly advocate for incorporating a live trading period to validate the backtesting of a promising trading strategy, which I refer to as the “make it or break it” phase, borrowing a phrase from a close friend who was a former McKinsey partner.
After meticulously backtesting a seemingly profitable trading strategy, I advise against an immediate transition to live trading.
After meticulously backtesting a seemingly profitable trading strategy, I advise against an immediate transition to live trading. Instead, I propose temporarily suspending the strategy for a duration spanning several weeks at minimum, and ideally extending to a few months or more, depending on trading frequency. Throughout this interim period, it is imperative to closely monitor the strategy’s performance with real trading data, whether through a demo account or by trading very small size.
Throughout this interim period, it is imperative to closely monitor the strategy’s performance with real trading data, whether through a demo account or by trading very small size.
This approach offers a distinct advantage by replicating real-life trading conditions, allowing traders to fully immerse themselves in the strategy’s performance and gain invaluable insights. Moreover, this prolonged observation period often reveals subtle nuances that may have been overlooked during the initial testing phase.
While a backtest can be swiftly completed within seconds or minutes, adopting this approach allows traders to witness the strategy’s evolution in real-time.
The primary strength of this method lies in its consideration of time. While a backtest can be swiftly completed within seconds or minutes, adopting this approach allows traders to witness the strategy’s evolution in real-time. In my assessment, the depth of comprehension acquired through this immersive process far outweighs the efficiency of a rapid backtest.
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