Skip to main content

The importance of backtesting -- fixing Trend Busters

I've been working hard to roll out new features at Alert HQ. I always try to do some backtesting to verify that these features are working as anticipated. Actually running the various screens and putting out the results at Alert HQ, though, always yields new insights.

For example, I recently introduced Trend Busters. This was an attempt to implement a system that would identify the recent trend and determine whether that trend had been violated. This was initially rolled out using a simple test: if the trend was pointing upward and the most recent price was 5% below the trend then it was a SELL signal. If the trend was heading downward and the most recent price was 5% above the trend then it was a BUY signal. This seemed to be pretty workable but in practice it turns out that sideways action will trigger a false signal.

This post is to explain some of the changes that have been implemented to make the Trend Busters signals more accurate. Here are some of the improvements we have made to BUY signals:
  • Verify that the closing price of the most recent day is higher than the closing price of the previous day
  • Verify that the low price of the most recent day is higher than the low price of the previous day
  • Verify that the closing price of the most recent day is at least 5% higher the closing price of the day when the most recent minimum price was established
  • Verify the most recent day's low price is higher than the high of the day when the most recent minimum price was established
For SELL signals, the conditions are essentially the opposite.

Our recent backtesting has validated that this new system rejects the most questionable signals. I am excited to roll out the new Trend Busters. The list will certainly be shorter than it has been in the past but the stocks and ETFs that do make the list will be much better candidates for the Trend Busters title. Be sure to check them out when the newest list is released this Saturday (tomorrow!).

For details on how the original process worked click (here) to read the introductory post.

Comments

Popular posts from this blog

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street profess

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing wh

Interactive Ads - Google one-ups Yahoo again

Google's ( GOOG ) press release describing the expansion of a beta program for what are being called Gadget Ads has again shown that Google is unparalleled at melding technology and advertising to benefit its bottom line. Gadget Ads are mini-web pages or "widgets" that can be embedded within publisher pages. I have written in the past on Yahoo's ( YHOO ) Smart Ads and how, by more precisely targeting site users and adjusting ad content accordingly, they provide a much desired evolution of the banner or display ad format. Though Smart Ads and Gadget Ads are not really the same, I think it is fair to say that Google has seen the challenge of Smart Ads and has chosen to leapfrog Yahoo by rolling out its own update to the display ad format. The evolution of the Gadget Ad -- One of the trends on the Internet over the last year or so involves software developers creating "widgets" which can be hosted within web pages and blogs. Widgets can be pretty much any