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Dyed in the Wool Backtesting and Chaos Theory – A Union Destined to Fail

At one time in my trading career backtesting was all the rage. The premise was relatively simple; if something has worked in the past it is bound to work in the future. In short, all you need to do is adjust your backtesting parameters until you optimize a result that produces consistently profitable trades. Of course, most traders who utilize this trading methodology are often stunned (and I mean extremely stunned) when all the careful data analysis does not translate to profitable trading, especially if you are an e-mini scalper. While I am not a swing trader anymore, I cannot attest to the validity of backtesting in that style of trading. For an e-mini scalper, though, you may as well spend your time on the golf course.

That is an absolutely outrageous statement, Dave. I don’t believe it…

It’s okay if you don’t believe me, but that does not make it any less of a fact. For starters, I would refer you to Benoit Mandelbrot’s “The Misbehavior of Markets” as a primer into one of the few trading models that can adequately explain market movement in a coherent, all-encompassing theory; efficient market theory flounders hopelessly when applied to scalping, fundamental analysis is even worse, and technical trading encompasses such a wide range of techniques it is scarcely definable. David Aronson’s “Evidence Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals” should burst the bubble of devout technical traders or at least some of the basic tenets of technical trading. (support and resistance are really the only scientifically significant method)

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