Do Professional Traders Backtest? – Trading Heroes

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Professional traders always backtest and verify their trading strategies before risking real money because their livelihood and in some cases, client money, is on the line. The average retail trader usually does not backtest their strategies and that is one of the biggest reasons that they are not able to make the transition to professional trading. 

Trader at trading desk

Now that you understand the value of backtesting, I’ll get into some examples of professional traders who backtest, tools you can use to backtest and the details of what backtesting does for professional traders.

Why Professional Traders Backtest

Trading laptop at a cafe

Professional traders backtest because they need to know if a trading strategy works or not. They also need to know detailed metrics about the strategy. 

It’s like buying a used car.

Would you buy a used car without test driving it first?

Of course not.

In a similar fashion, a trader needs to “test drive” a strategy to find out if it has an edge. 

On top of that, backtesting gives a professional trader important information about the trading strategy.

Some of the key metrics that traders look at are: 

  • Maximum drawdown
  • Potential average monthly return
  • Correlation to other trading strategies
  • Volatility of the trading strategy
  • Risk of ruin

Backtesting also helps professional traders determine the optimal position size, risk management strategy, and identify the ideal timeframe for their trades.

Examples of Professional Traders Who Backtest

Now you’re probably looking for some examples.

There’s actually no shortage of examples of traders who backtest, so let’s take a look a few big names and one you may not have heard of before. 

If you want to learn more about these traders, do further research on your own.

Their history is fascinating. 

Richard Dennis

Richard Dennis was a highly successful commodities trader known for his Turtle Trading Experiment.

In the early 1980s, Dennis recruited a group of novice traders, taught them his trading methodology, and provided them with funds to trade.

These traders, dubbed the “Turtles,” achieved extraordinary success, demonstrating the effectiveness of Dennis’s trading approach.

He was a pioneer in trend-following trading strategies and emphasized the importance of backtesting, discipline and risk management in trading.

Dennis’ legacy continues to influence traders and investors worldwide, highlighting the potential for success through systematic trading methods.

Ed Seykota

Ed Seykota is a highly respected trader and pioneer in the field of computerized trading systems.

One thing that he’s famous for is he used to backtest when computer programs were written on paper punch cards.

He gained fame for his exceptional performance as a trend follower and for his innovative use of technical analysis.

Ed is known for developing and implementing systematic trading strategies based on mathematical models and algorithms.

He was one of the original market wizards featured in Jack Schwager’s book, “Market Wizards.”

Seykota’s contributions to the field of trading, particularly in the realm of automated trading, continue to influence traders and investors worldwide.

Larry Connors

Larry Connors is a prominent trader, author, and educator known for his expertise in the field of short-term trading strategies.

He has authored several bestselling books on trading, including “Short-Term Trading Strategies That Work” and “High Probability ETF Trading.”

Connors is recognized for his research-based approach to trading and his focus on quantifiable methods.

He has developed numerous trading systems and indicators, particularly in the realm of high-probability trading setups.

Larry is highly regarded within the trading community for his contributions to the development of systematic trading methodologies.

I backtested one of his strategies here

Colin Jessup

Colin’s story might be a little more relatable than the previous case studies.

He was working as a warehouse manager when he first started learning to trade.

From his humble beginnings, he was able to become good enough to be hired as a professional fund manager, managing a fund worth several million dollars.

On top of all that, he’s a really cool guy and I had a lot of fun in this interview.

In this interview, he shares the role that backtesting had in his success.

?

There are Many More

But that’s just a tiny sample of professional traders who backtest.

Do your own research and find more.

There are a ton of examples on YouTube.

Tools Professional Traders Use to Backtest

Backtesting chart

Professional traders use a variety of tools to backtest their trading strategies.

Some of the most popular tools used by independent professional traders include backtesting software such as NakedMarkets, MetaTrader 4, or TradeStation, and programming languages like Python or R.

These tools allow traders to automate the backtesting process, which saves them time and improves accuracy.

Spreadsheets such as Excel are also popular among professional traders because they allow traders to do custom data analysis.

When I worked at a hedge fund, they used Excel to track their trading results.

MATLAB and custom built software is used by institutional traders and hedge fund managers.

These are more sophisticated solutions that can do complex calculations and custom functions.

But regardless of the skill level you’re at now, there is a backtesting solution for you. 

Conclusion

I’ll say it again, professional traders backtest.

Period. 

It allows them to evaluate the effectiveness of their trading plan, indicators, and risk management.

Backtesting also enables traders to identify areas for improvement.

When backtesting, it’s important to consider fees and commissions, as they can significantly impact your net profit/loss.

Optimization should be used cautiously, as over-optimization can lead to curve-fitting and poor performance in the future.

Finally, using backtesting software such as NakedMarkets and MetaTrader 5, can help you speed up your backtesting.

If you’re new to backtesting, continue your education by reading this backtesting guide.

By incorporating backtesting into your trading routine, you’ll dramatically increase your chances of becoming a professional trader too.

 



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