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It is always very easy to see what you
should have done on a chart. It is much more difficult to make a decision at the time.
This is one of the problems with attempting to test trading systems and approaches because
we ‘know’ what really happens. The usual procedure means we bring up a
historical chart showing twelve months of previous price history. Then we apply our
favorite indicator and see if it generated buy and sell signals at the right times. The
objective is to find the indicator combination, or parameter, that captures the best out
of each trading opportunity.
Adjusting the parameters of indicators is called optimization. All traders explore this
path before deciding that one particular combination gives a pretty good answer for most
trades. We use a 10 and 30 day moving average combination, but others are 7 and 21 day and
5 and 15 days. These work well for most stocks, but you might find an individual stock
where a 12 and 27 day combination is perfect.
No matter which parameters we use, the real challenge is to develop the confidence to act
on the signals when they are delivered in real time. When we get the signal we do not have
the ability to see what is going to happen. We have to wait for price action to develop,
and this makes the trading decision harder to implement and stick with. Uncertainty gnaws
away at our resolve. An alternative is to use a historical chart and roll it forward one
day at a time. This allows the trader to replicate the decisions he would be called upon
to make in implementing his selected trading approach.
Rolling the chart forward day by day is like using training wheels to test trading ideas
and the Guppy Traders Essentials pack makes this very easy. We used this approach in the
recent series of trades where we asked readers to make the exit decision.
The objective is to enter this WBC trade on the day after the CBL entry signal. This is
not a complex trade. Our objective is to show how the training wheels work so we want to
delete all of the chart information going forward from September 28. We want to see how
price action develops, day by day so we can replicate the types of decisions we would need
to make in implementing a trade based on this indicator.
We first select the ENABLE TRAINING button at the bottom left of the screen display. This
brings up today’s date, and a menu box. Clicking on the down arrow brings up a
calendar display. Use the back buttons to select your preferred starting date for the
display. We use Friday, September 28 as the start point.
As soon as this date is selected, the screen display changes. Now the
September 28 bar is the last bar on the chart. We move the chart forward, day by day, bar
by bar, by clicking the + button. Each click adds a new day and gives us the opportunity
to see how the trade developed, and how the selected indicator changes.
We use a CBL line in this example, and with each new high we have to use the CBL tool to
add the new CBL stop loss line. If we had selected a moving average, then the value of the
moving average is automatically updated and displayed as each new day is added.
When these steps are applied to more subjective indicators, such as an RSI and MACD or
MACD_H it gives you an opportunity to really see how you would have interpreted the
indicators as the trade developed. This is an easy-to-use feature which provides a
valuable training option for new traders. It also helps in back testing trading systems
for experienced traders.
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