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Backtesting the Trend Following Strategy

Let’s talk about a commonly known trading strategy – trend following!

The trade setup:

Fast Moving Signal – 30 Day EMA Slow Moving Signal – 90 Day EMA

Go Long – When 30D EMA rises above 90D EMA Exit Long – When 30D EMA falls below 90D EMA

Backtesting the Trend Following Strategy

Lets look at the backtested result: Here’s the Equity Curve from the above trade setup

And here’s the Drawdown from the trade setup

Thanks to back-testing reports, we know that the trend following strategy needs improvement.  In order to further optimize the strategy, let’s add a stop loss and look at the results, shall we?

We’ve added an ATR based stop loss to the trend following strategy. As a result, the strategy is further improved.

Do you think we can better optimize this? Drop your two cents in the comments section.

After adding a percentage-based stop loss to our basic strategy, we’ve been able to reduce the drawdown by more than 45%!

Let’s try adding a target profit and see what back-testing results that generates!

A quick glance at the Portfolio Equity Curve & Drawdown Curve from the strategy tells you that we’ve improved by a lot. Adding a stop loss and a target profit mechanism to the basic trend following strategy has helped.

Having seen the optimized results of this basic a strategy, we know that back-testing has made us come out of the better end of the tunnel. Hence, remember that backtesting is an important feature while developing a profitable strategy.

Do you want us to back-test your strategy next? Contact us via contact@arque.tech or visit our website: www.arque.tech for more information.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from ArqueTech and is being posted with permission from ArqueTech. The views expressed in this material are solely those of the author and/or ArqueTech and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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