The Problem with Testing

Even though trading occurs in a pressure cooker of emotion, testing is performed in an emotional vacuum. Imagine an aerodynamically slick race car designed in a wind tunnel that handles poorly in the turbulent wake of other cars on race day. Similarly, a high-performance system based on historical data can provide a bumpy ride in actual trading.

Your computerized system testing occurs unemotionally, without any fear of losing money. All you see are a summary of the results and colorful up or down arrows pointing out entries and exits. You do not have to suffer through losing streaks during testing. Nor do you have to agonize as the system is late to enter or slow to exit. You do not have to create orders, enter orders, track fills, remember rollovers, monitor mar­gin, or read the daily equity run. What is more important, you do not have to actively monitor position risk or make any money management decisions.

During computer testing, you do not have any fear of losing money or missing opportunities. Thus, system testing using software is a sterile environment that fails to capture the emotional components of system implementation. Hence, if you use all your creativity to develop a trad­ing system that considers all the factors we have discussed, then all you have to do is to focus on system implementation.

Trading is an acquired skill. Perhaps the only way to acquire and maintain a new skill is to endure endless repetitions. Computerized test­ing does not allow you to build any skills in implementing the system. Thus, no amount of testing can give the repetitions needed to develop the many skills necessary to physically implement a system. Clearly, you need some more tools to address these key limitations of system design and testing.