Back Testing (Strategies) P3 | thinkScript Studies on thinkorswim | 6-14-24

Introduction

Welcome back to another session of thinkScripting. In this session, we will continue our discussion on backtesting strategies and optimizing our results. We will be looking at a chart of the S&P 500 and identifying areas where our strategy could be optimized for better performance.

Before we dive into the details, let's quickly go over some disclosures. The information presented here is for general informational purposes only and should not be considered personalized investment advice. We use the paper money software for educational purposes only, and past performance does not guarantee future results.

To begin, let's review the concept of compounding when it comes to backtesting. When we see profit numbers in our backtesting results, it's important to remember that they do not include the compounding effect. This means that the profits we see are not always directly comparable to the buy and hold returns. However, not having the compounding effect can be both beneficial and detrimental depending on market conditions.

To illustrate this concept, let's imagine we start with $ 1 at the beginning of a chart. If the market takes a 25% move up, the investor who stayed invested with the $ 1 will make $ 1.25. However, with a strategy that doesn't compound, we would only see a profit of $ 0.25 because we are investing the same dollar amount each time. This is an important consideration when comparing backtesting results to buy and hold returns.

Now, let's move on to optimizing our strategy. One method of optimization is to look for opportunities to improve our backtesting results. We can do this by identifying areas where the market made a significant move while our strategy remained relatively flat. The goal is to find ways to enter and exit positions that align better with market movements.

To optimize our strategy, we can use the ThinkorSwim platform's thinkScript feature. By using thinkScript, we can add specific conditions and rules to our strategy. For example, we can create an entry rule that triggers when the market drops below a certain percentage of the lower Keltner band, indicating oversold conditions. We can also add an exit rule based on a moving average crossover, in addition to our original exit rule.

After optimizing our strategy, it's important to backtest it again to see if the changes have improved our results. We can apply the optimized strategy to different securities such as Apple and VOO to see if it performs better or worse in different market conditions. By doing this, we can get a better understanding of the potential effectiveness of our strategy across various stocks.

In conclusion, optimizing a backtesting strategy can lead to better performance by aligning our entries and exits with market movements. By using thinkScript on the ThinkorSwim platform, we can add specific conditions and rules to our strategy and test its effectiveness. It's important to remember that backtesting results are hypothetical and do not guarantee future success, but optimizing our strategies can increase the likelihood of better performance.

Introduction

• backtesting strategies
• optimizing results
• compounding effect
• entry rule
• exit rule
• thinkScript
• ThinkorSwim platform
• Keltner bands
• oversold conditions
• moving average crossover

Introduction

1. What is backtesting a strategy?
   • Backtesting a strategy involves applying specific conditions and rules to historical data to see how the strategy would have performed in the past.
2. How can I optimize my backtesting results?
   • Optimization can be done by identifying areas where the strategy underperformed and making adjustments to improve performance.
3. What is the compounding effect in backtesting?
   • The compounding effect refers to the potential for profits to increase over time as they are reinvested. In backtesting, we may not have the same compounding effect as in real-life investing.
4. How can thinkScript on the ThinkorSwim platform help with backtesting?
   • ThinkScript is a feature on the ThinkorSwim platform that allows users to customize and add specific conditions and rules to their backtesting strategies.
5. Are backtesting results guaranteed to reflect future success?
   • No, backtesting results are hypothetical and do not guarantee future success. It's important to consider other factors such as market conditions when making investment decisions.