How do you backtest and optimize your momentum indicator strategies?

Indicators need more back testing than trading candles alone. Lets take an example of RSI. Generally, people say above 70 is over bought and below 30 is over sold. But there are other things to consider like Bullish and bearish divergences, Hidden divergences, etc. Meaning, every indicator has its own branches. So, a person first has to back test rsi, then its divergences, then align the data and then possibly go for a trade. Indicators are 'Extra Confirmations' for a trade. Learning basics first is necessary, like knowing candles, supports, resistances, etc.

FOR ENTRY: This comes from back testing. Some trade when the market takes a support at moving average, some trade when the trade takes two times support at moving averages, etc. One should trade what he/she has back tested and has good accuracy. FOR EXIT: I have known one thing in my trading, MAX LOSS will be 20-30% of the value I trade. This thing needs to be calculated at lightening speed before taking a trade. If I see my stop loss greater than my capacity, I DONT TRADE, I wait for another trade.

Best back testing technique: A paper and a pen! First back testing attempt should be this. write whatever gets to the mind. Slowly take the next back testing data on Excel sheets. Then, when one gets set, then go for platforms to fill data.

One thing that may be missing is the importance of considering slippage and transaction costs when backtesting and optimizing momentum indicator strategies. These factors can significantly impact the performance and profitability of a strategy in real trading conditions. Therefore, it is important to include them in your simulations and adjust your expectations accordingly. Additionally, it may be helpful to test your strategy on different timeframes, markets, and instruments to ensure its robustness and diversify your portfolio.

Some ideas: - Alternatives to Traditional Backtesting: It's worth noting that aside from traditional backtesting, traders may use paper trading or forward testing to gauge the effectiveness of their strategies. - Data: Cleaned data to aviod biases like lookahead bias - Costs: As Philip mentioned, include realistic costs like slippage and commission. Otherwise the backtest is not meaningful.

Continuously evaluate and adjust: Finally, remember that market conditions can change, so you should continuously evaluate and adjust your strategy as needed. Regularly backtesting and optimizing your strategy can help you stay ahead of the curve and improve your trading performance over time.

Address common mistakes traders make when backtesting. Highlighting issues like lookahead bias, overfitting (mentioned but could be expanded upon), and data snooping will help readers avoid them. Furthermore, engage and exchange with peers.