Backtesting Frustration (Part 5)

Given everything I said about spotty/flawed data, and the occasional need to manually add additional strike prices, starting later would probably be better. This presents another set of backtesting problems that I will discuss today.

Starting the backtest where I know the database is more complete (e.g. 2005) would result in fewer workarounds, fewer holdups, and faster overall progress. By shifting the hardest work to the end, this would serve as an effective antidote for much of the frustration I have been discussing in this blog mini-series.

Unfortunately, in order to generate an equity curve I need to start at the beginning. The process records account value every trading day to allow any errors to be immediately identified and fixed, which preserves integrity of the curve. Also as a cumulative summation to date, an equity curve does not even make sense without all previous trades being logged.

In order to get through, I have just been trying to accept that the research will take much longer than it probably should. I go through the 16-year database once to perform the backtrades. I then go through the database again to record equity values. I can’t do it all together when my attention is split in so many different directions trying to keep up with what statistics to record (dictated by the column headers), filling in missing data, and sometimes reviewing for data accuracy. The harsh reality is that a second time through can easily add 2-4 weeks on top of what has already been 2-4 months.

Backtesting stop-losses presents a similar conundrum. This is what inspired the current blog series after frustration forced me to abandon my last butterfly backtest. I tried to include stops in the column headers so I could watch for them every trading day. I was monitoring two profit targets, two stop-loss levels, and MAEs for multiple open trades in a spotty portion of the database. My cognitive capability was simply overwhelmed.

One could argue the most accurate way to collect stop-loss information is to first record MAE for all backtrades and then filter by different stop levels (e.g. 1x, 2x, 3x) to later go back and retest only those trades reaching the different levels to determine the actual end-of-day losses.

While it may be accurate, it certainly is not efficient or fast. I hope OptionVue can help me more with that as time goes by.