Mechanical Trading Methods
"Professional traders use step testing
methods to test their systems"
Nearly all systems use variables called parameters, which can be varied to alter the precise action of the ‘basic rules’.
Finding settings that 'show promise' can prove very difficult due to the number of different possible combinations of these parameters, each of which produces different results.
For example, there is a well known system that uses three different moving averages set to values representing a number of days. If you wished to produce test results spanning a range of 10 days for each of these averages, it would require 10 times 10 times 10 complete runs of your system. That is 1000 runs!
If you were testing over a 10 year history period, with a list of say 25 commodities that is a very big job.
Perhaps the first thing that strikes you is the amount of processing your software will have to do - but now think about how you will set up the tests to conduct those 1,000 complete 10 year runs.
Obviously, you will want all of this to be done for you automatically.
Your computer will start off with all three initial parameter settings, make one run and then advance or step up one of the parameters.
Without intervention - it will then make another run and so on, moving
methodically through all the 1,000 different combinations and producing full results for each of the runs.
When the step testing has finished, all of the output for the 1,000 runs will be there for you to inspect and analyze at whatever level of detail you choose.
The example given is a common one and illustrates how professional traders make the best use of their time and the power of their computers. By the way, how long would it take the trader's specialized software to process the 1,000 test runs on his notebook PC?
Enough time to make himself a cup of coffee but not much more.
With efficient software, there is no temptation for a trader to cut corners or not use all the information that is obtainable.
Yes, step testing is certainly vital!
Copyright David Bromley 2006
All Rights Reserved.