How do you test and validate your hypotheses with technical indicators?

3 Backtest your strategy

The third step is to backtest your strategy using historical data and see how it would have performed in different market scenarios. Backtesting is a process of applying your rules to past price movements and calculating the hypothetical results of your trades. You can use various software tools or platforms to backtest your strategy, such as TradingView, MetaTrader, or Python. You should backtest your strategy over a sufficiently long and diverse period of time, covering different market cycles, trends, and volatility levels.

4 Evaluate your results

The fourth step is to evaluate your results and see if your strategy is profitable, consistent, and robust. You should analyze various performance metrics, such as the win rate, the average profit or loss per trade, the maximum drawdown, the Sharpe ratio, or the CAGR. You should also compare your results with a benchmark, such as the market index or a buy-and-hold strategy, to see if your strategy adds value or not. You should also look for any biases or errors in your backtesting process, such as data snooping, curve fitting, or survivorship bias.

5 Optimize your parameters

The fifth step is to optimize your parameters and see if you can improve your strategy by fine-tuning your indicators or rules. You can use various methods to optimize your parameters, such as grid search, genetic algorithms, or machine learning. However, you should be careful not to over-optimize your strategy and make it too complex or specific to the historical data. You should also test your optimized strategy on a different set of data, such as out-of-sample or forward testing, to see if it still works well or not.

6 Update your strategy

The final step is to update your strategy and monitor its performance in real time. You should keep track of your trades and results and see if they match your expectations and hypotheses. You should also review your strategy periodically and see if it still fits the current market conditions and your trading goals. You should be ready to adjust or change your strategy if necessary, based on your feedback and learning.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?