Strategy backtest pt.9 - "past performance is not an indication of future results"

"Past performance is not an indication of future results" - you can read this sentence whenever the performance of a trader or a trading strategy is presented. Somehow every trader, no matter if professional or beginner, would agree that this is a very true warning. At the same time it also puts all the backtesting effort into question. In fact, after working on a suitable strategy for months, I learned how true this sentence is - fortunately without loosing real money...




After months of working on a suitable strategy with my backtesting tool, I finally found a setup that worked very well with continuous gains and small drawbacks. At this time I was still working on the DAX historical data between 1992 and 2004. When I continued calculating the performance up until 2016 I realized, that the strategy only works great until 2010, as you can see on the following chart:



After 2010, the strategy was mostly losing money. At first sight the results don't look that bad, as there is a great overall profit by the end of 2016. But imagine you started applying the strategy in 2010, when the performance peaked. That would have left you with only little more than 30% of your original equity - a 70% loss after 7 years! So it is true: "Past performance is not an indication of future results".

Although I don't believe you will want to apply this strategy, you might be interested in its setup:

• market trend: bullish when rate > 50-day-EMA, bearish when <50-day-EMA
• open buy-trade on red candle via order on opening rate
• open sell-trade on green candle via order on opening rate
• close trades on reinforced stop loss (0,5%) and take profit (15%)
• leverage 25
• delay factor 0.004%

Now the question is: What has changed in 2010 that turned a profitable strategy into a lossy strategy? To be honest: I don't really know yet, but I have a theory. Markets have changed as professional trading tools became accessible to everyone. Nowadays you have free access to stock charts in different time frames, charting techniques, price alerts, and so on. You can trade from wherever you are, as long as you have access to the internet, not matter if you use a computer, tablet or smartphone. The whole idea behind technical analysis is, that a chart tells you everything that is going on in the market - it tells you about the behavior and sentiments of the bulls and bears. And if they change their behavior, markets will also change. Thus a successful strategy has to be adjusted to the latest market characteristics in order to stay profitable. And that is where backtesting can be helpful again. Of course it can't predict the future, but it can help finding better setups without risking real money.

What are your thoughts about the strategy in this post? Do you have other ideas or explanation why the strategy stopped working in 2010? Please leave a comment and let me know!


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Related post about backtesting

• pt. 8: using trade orders
• pt. 7: stop loss limits
• pt. 6: delay factor
• pt. 5: market trend
• pt. 4: short trades
• pt. 3: stop losses
• pt. 2: long trade indicators
• performance index DPI
• backtesting tool

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Important remark: The results presented above and throughout my blog are no recommendation for your trading! I only share my personal findings and opinions to give ideas and let my followers and copiers know what I am currently working on. I can not guarantee the correctness of my tool and my presented results. Furthermore past performance is not an indication for future results. Only trade with money you can accept to loose!