I'm continuing here from a bit of a discussion that started in the "introduce yourself" thread. I thought rather than clutter that up with a discussion about backtesting, I'd transfer it here. Apologies if I've picked the wrong forum, if so please advise and I'm happy to move it.
My question is, does backtesting work? By that I mean that, if I get positive results running a system on historical data, what are the chances of it continuing to deliver the same results into the future? My experience, when I first started learning to trade, was that, yes, backtesting does work. It is certainly advocated by many people, including trading trainers, courses and books, and there are many software packages and programs out there that will automate your backtesting for you. It also begs the question, if you don't use backtesting, how else can you tell if your system is going to work? There is no other way. I don't think any of us would be game to invent a system and then just start trading it.
But my experience of late is the complete opposite. Check out the screenshot below (which I hope I've inserted correctly). The result before the red line were as a result of tweaking my system in backtesting. The result after the red line is forward testing. (and, incidentally, my result from actually running the strategy for that week, in sim fortunately). Not terribly impressive.
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Before you accuse me of curve fitting, let me explain my system is pretty simple. It looks for a long(ish) trend then a small pullback and continuation in the direction of the trend. It then looks for the price to cross back past the pullback again, then cross it again the other way. When that happens it enters a trade in the opposite direction to the original trend. Not rocket science, and not full of conditions for when this happens or that happens do something different (tried that, doesn't work either). On screen it looks like this (example is entering a short). The horizontal green line is at the pullback, the two green arrows show the cross below and cross above. The blue arrow is the entry confirmation. (this was a loser, btw). Red dots are my stop loss, green dots profit target.