30 trading habits in 30 days- backtesting

Welcome back to our new series 30 trading habits in 30 days.

I was at the Pig ‘N’ Whistle on 3rd for lunch yesterday with 3 trading/investing thought leaders at Baruch College. These young student traders asked: are markets going to be run exclusively by automated traders?

I answered, “No. But a discretionary trading firm like ours has been doing much more automated trading, building of trade signals and backtesting.”

Let me give you an example of how backtesting can help your trading.

The Trade

Dell announced they were buying EMC.

My partner, Steve Spencer, has encouraged firm traders to short the acquirer after a deal hits the tape. As an experienced trader he observed, in this present market regime, shorting the acquirer offered a good risk/reward.

One trader on our desk MW started dabbling with the trade and made it his own. This trader later went on to run a team, Team MW. And his team backtested this trade with one additional variable, time.

The results?

A trade with a 66% win rate. Wow!

So now Team MW took the observation from a veteran trader for a trade that would work AND they backtested specifically a setup that gave them edge.

When Monday’s trading session opened they expressed this edge by shorting VMW since Dell is private and was the stock most similar.

Both traders profited. Both traders were much more confident in their shorts. Both traders can trade this trade larger. Both traders have guidance with time when to exit.