Thread: backtesting the behavior BEFORE a price pattern occurs

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  1. #1

    Default backtesting the behavior BEFORE a price pattern occurs

    Hey guys and gals. I just had an interesting idea that sounds like something most mechanical system designers/traders have not done.

    Let's say you identify a certain price pattern or indicator pattern. Name it "Price Pattern A". Plenty of backtesters would try to get a histogram of closing prices for 1, 2, 3,... days after Price Pattern A. However, wouldn't it be interesting to get a histogram of closing prices for 1, 2, 3,... days before Price Pattern A?

    For instance, what if we found that any one of these were true:

    1. 90 of the time, Price Pattern B preceded Price Pattern A within 10 days.
    2. 5 of the time, Price Pattern C preceded Price Pattern A within 10 days.
    3. Price Pattern D never preceded Price Pattern A within 10 days.
  2. #2

    Default

    if you used analogy of Price as crash, price pattern A could be a car crash, pattern B a plane crash, etc.

    you have an interesting thought going on there.
    but how is this different from the statistical odds of a part-formed Shoulder and Head pattern resulting a fulfilled or failed Head and Shoulders pattern.
    Or the odds of a 1-2-3 reversal, or support or resistance holding or failing.

    At least the partly-formed pattern of a 1-2-3 or Sup/Res has internal logic, whereas the proximity of PatternA to Pattern B seems arbitrary.
  3. #3

    Default

    Maybe it's a bad example. If you backtested car crashes, you might find that 25 involved drunk drivers. However, this doesn't tell you what percentage of people who are currently driving drunk right now will be in a car crash.
  4. #4

    Default

    I would say this could be extremely useful.
    This would be a very clever way to create or improve trading strategies/systems.

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