There’s a lot of argument about the minimum number of backtesting trades that you need to prove that a trading strategy really works.
Some say 30 trades…others say 100.
So who is correct?
The minimum number of backtesting trades that a trader needs to prove a that trading strategy works will depend on the timeframe the strategy is traded on, how often the strategy trades and how confident the trader is in the backtesting results.
In other words…it depends.
Since there isn’t a single number that will work in all situations, I’ll explain all of the factors that you need to take into account when figuring out what’s the right number of trades for you.
Let’s get into it…
The Myth of 100 Backtesting Trades
Before I get into what you need to prove a trading strategy works, I have to address a HUGE myth in backtesting.
I don’t know where this myth came from, but it’s one of the dumbest ideas in trading that many trading educators still perpetuate.
So if you’re wondering why your trading isn’t profitable, then this video will help you understand why a minimum of 100 backtesting trades doesn’t make sense, in most scenarios.
If you prefer the text version, it’s provided after the video.
Why a Minimum of 100 Backtesting Trades is Completely Ridiculous
Daylight savings time, measuring temperature in Fahrenheit and a minimum of 100 backtesting trades.
What do these things have in common?
They all don’t make any sense.
Now in all fairness, I can see why someone might think that 100 backtested trades is a good number to use.
It seems about right…at least at first glance. You want to have a lot of data and 100 trades seems like a big number.
But when you really think about it, you cannot use 100 trades because that is usually too big of a number or too small.
It depends on which timeframe you’re trading on.
Here are 2 examples from opposite ends of the spectrum that will illustrate my point.
When 100 Trades is Too Small
If you’re backtesting a day trading strategy, 100 trades is not nearly enough to see if a strategy is reliable.
Let’s say that you’re backtesting a day trading strategy that averages 1 trade per day.
There are about 20 trading days per month. So if you have 20 trades per month, 100 trades will only represent 5 months.
That’s not nearly enough to see how the strategy performed over several market cycles.
For example, here’s the monthly chart of the S&P 500 from 1968 to 2024.
The thin vertical green box in 2013 represents about 5 months.
As you can clearly see, this a very, very small sample of the total amount of historical data.
So if you only tested during this small period of time, you won’t know how well the strategy works in volatile markets, sideways markets, trending markets and quiet markets.
You might test in a really good period for the trading strategy, or you may catch a bad period.
In any case, you won’t get an accurate representation of how well the strategy works over a long period of time.
When 100 Trades is Too Much
Now if you’re trading on a longer timeframe like the daily chart, then 100 trades might not even be achievable.
You might not get 100 trades in 20 years.
But what if your strategy only gets 80 trades during that time and makes a ton of money on just a few trades?
This is common with trend following strategies.
They generally only produce a few trades a year, with 2 or 3 monster trades that more than make up for all of the losing trades, with a huge profit to boot.
In this case, would you insist on having a minimum of 100 backtesting trades?
Probably not.
Another scenario is if you’re backtesting in a fairly new market.
It might be a cryptocurrency or a fairly new stock.
When backtesting in these markets, you might only get 30 trades.
What do you do then?
Well, it comes down to this…
How to Figure Out What’s the Right Number for YOU
Now that you understand why 100 trades cannot be used as a minimum number of backtesting trades, the question becomes:
What is the best number of backtesting trades?
I wish I could give you a single, definitive number, but that’s not how it works.
Like with a lot of things in trading, it really depends on the situation.
Traders need to feel confident that the backtesting results demonstrate that the strategy will work in many different market conditions.
So be sure that you have backtesting software that gives you detailed statistics on your backtesting. This is a big key to understanding how reliable a trading strategy is.
If you’re day trading, you don’t need to test your strategy for every single day over 20 years. But you do need to test chunks of time in different market conditions.
You may want to backtest a 1 year period in each of the following market conditions:
- Volatile market
- Quiet market
- Strongly trending market
- Weakly trending market
- Sideways market
On longer timeframe charts like the daily chart, you might want to test your strategy in multiple markets to gain confidence.
In Forex, you could test multiple currency pairs.
With stocks, you could test the strategy with many different individual stocks.
You get the idea.
Because there is no set minimum number of trades, you’ll have to rely on how you feel about the results.
This will take some practice.
So when you’re first starting out, don’t start trading live right away.
Even if you think that you’re confident in a strategy, start trading it in a demo account first. This is called forward testing.
If you get similar results in demo, then you can start trading real money.
After a few cycles like this, you’ll get a feel for what good backtesting results look like and at that point, you may want to skip the demo trading step.
Conclusion
So that’s how to figure out how many backtesting trades you need to prove that your trading strategy works.
You cannot say that there is a set number of minimum trades because it will really depend on the situation.
But of you follow the guidelines in this tutorial, you’ll quickly get a feel for how many trades you need in each situation.
The post The Number of Backtesting Trades You Need to Prove a Strategy appeared first on Trading Heroes.
Original source: https://www.tradingheroes.com/minimum-backtesting-trades/
