Today we see how to use the backtest function to analyze the character of an instrument in TradeStation and MultiCharts.
Any financial instrument has a fundamental character; it can respond well to breakout strategies or mean-reverting strategies.
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So, a straightforward first approach can be to try a strategy that buys at the breaking of the day’s high and sells at the breaking of the minimum of the day before.
To perform these tests, the strategy must be simple. You won’t even have to use money management, stoploss, or take profit. Also, you won’t even have to use other filters.
How to use the TradeStation backtest to analyze AUDUSD character.
Let’s start with AUDUSD to show you how to proceed.
The simple code for breakout strategy:
As you can see, the strategy buys when today’s Close exceeds yesterday’s High and sells when today’s Close exceeds yesterday’s Low.
In this first step, it is only necessary to verify that the equity line is ascending.
The other backtest parameters for the moment are not to be considered.
So, AudUsd responds well to breakout logic. This test shows us that after breaking the highs and lows, the movement generally continues.
If we try a mean-reverting strategy, it should not work and have descending equity.
The code for a Mean-reverting strategy could be:
As you can see, the strategy buys when today’s Close exceeds yesterday’s Low and sells when today’s Close exceeds yesterday’s High.
Unfortunately, after 2013, the volatility in the currency market has been decreasing. This led to a worsening of the breakout logic. These simple backtest give us confirmation.
The S&P index
For example, if we do the same test on U.S. index that has a reversal character like the S&P, the result is visible.
This is only the first step to verify the fundamental character of an instrument.
Now we know that the S&P index reacts well to reversal logics and does not react well to breakout strategies.
Let’s start with this to develop a strategy.
It is useless to want to trade an instrument contrary to its inclination.