August 9, 2014

Question on backtesting

Question: Have u backtested KPL Swing indicator in Nifty, Bank Nifty or Stocks ? if yes, What is the result during last 5 years

Bhailalbhai

Answer

Short answer - backtesting is usually a waste of time.

Long answer - all indicators work beautifully in trending markets and fail miserably in rangebound markets. This is true for kplswing indicator and in rangebound markets it can give horrible results.

This is an example of bad trades ... here the 50 DMA indicator (blue line) has given even more whipsaws compared to kplswing.



Same stock but in trending market....because of its very nature, kplswing indicator will give fewer whipsaws than any moving average.





Almost any indicator will work only the half the time... this is the reality and once you realize this, then there is no need for backtesting. There is nothing called a perfect indicator or an indicator which has a 70-80% success ratio... these things do not exist.

No one has ever made money because a indicator is good. You make money because you exit lossmaking positions fast and hold to winning positions as long as possible. Position sizing is another reason how people make money.

Consider this stock which has gained 200% in less than 2 years. Does it mean that the indicator was excellent? Obviously not. Here even a 20,30 or 50 dma would have given similar results.


Hope this helps.

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