Way of the turtle

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Way of the Turtle

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opportunities for profits. They then trade by using ideas designed
to capitalize on those opportunities. New traders often pore over
charts for months before starting to trade so that they can under-
stand what the market did in the past. They do this because they
know that the best indication of what the markets are likely to do
in the future is contained in the past.
It is not hard to argue that computers can test ideas more reli-
ably using the same historical data. Computer simulation enables
traders to perform a more rigorous analysis of a particular strategy
before trading begins. Then the traders often find that ideas that
appeared promising will not work because of something that was
not anticipated. It is much better to figure this out by computer
than with an actual account.
The reason some traders do not believe in historical simulation
is that there are many ways to distort backtesting. It is easy to use
the power of a computer to find methods that appear to work but
will not work in real markets. These problems are tractable if you
make sure to avoid the most common pitfall: Overoptimization.
This topic is covered in Chapter 11.
Proper historical testing requires some experience and skills that
beginning traders do not possess. However, the fact that you would
not give a sharp knife to a small child does not mean you don’t want
to use one in the kitchen when you are cooking. You just need to
be careful with sharp instruments.
A historical simulation does not predict what you will encounter
in future trading, but it will give you a way to determine whether
an approach is likely to be profitable in the future. It is not the opti-
mal solution—a crystal ball or time machine would be better—but
it is the best tool that is currently available.
Turtle-Style Trading: Step by Step
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