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How to test my new stock trading idea

Personal Finance & Money Asked by jakec on February 13, 2021

I am a hobby astronomer and also a beginner hobby stock price observer. I suspect there is pattern in stock price during some planet and sun cycles. I cannot tell you the pattern. It is secret at the moment. I dont need you to mock me for doing "pseudoscience astrology". All I need is methods to prove or disprove my theory patterns. Using scientific methods, numbers will speak for themselves. What are common methods for proving or disproving stock price pattern hypothesis? I know how to do a bit of computer programmation, so I can do automation if necessary.

3 Answers

Price related patterns can be tested in Excel as well as commercial software. The latter is far more adept at testing a strategy on multiple datasets and much of the programming is already built in.

Either way, if you can write a mathematical formula, both will facilitate strategy performance.

Testing visual patterns generally requires grunt work, looking at one chart at a time.

Answered by Bob Baerker on February 13, 2021

Welcome new user,

  1. Your concept for stock picking ("astrology related") is no more or less whacky than almost all other "schemes" for stock picking.

  2. What you're looking for is called "backtesting". It is a completely established field and you can instantly click on a backtesting suite (online, desktop, phone, whatever) and instantly "backtest" your concept. Again, you can instantly buy/find "backtesting" software and online systems, it's completely established. No programming is needed, no more than you would start programming a "text editor". Just click around online and start backtesting. Enjoy!

  3. Note however that "backtesting" is psycho voodoo nonsense. It doesn't work, it's utterly silly on at least three different levels, and the fact that people still do it in the face of decades of overwhelming failure says it all about trading "technology".

Also...

"All I need is methods to prove or disprove my theory patterns...."

There is one and only one way to do this.

Take some money (what about $5,000) and start trading your system. Do that for some years. You'll now have (some) evidence of whether it works.

I caution you that planets are an expression of the behavior of gravity, but markets are an expression of the behavior of consciousness.


. Do note that opinions differ wildly on trading ideas. And only extreme opinions exist.

Answered by Fattie on February 13, 2021

You can test your theory by simulating it.

  1. Give yourself a million imaginary dollar (or other preferred currency).
  2. See which stocks you should buy right now with that imaginary million according to your system.
  3. Create a spreadsheet for the imaginary stock portfolio you would build with your imaginary million (which stocks you would own and how much)
  4. Wait and see what happens. When your system tells you to make trades at specific times, update your spreadsheet and your imaginary account balance according to the current stock prices.

After a couple years you should be able to tell if your imaginary portfolio beat the market or not.

(Possible weak points: This simulation assumes that you will be able to trade any stock at any time for its current market price. With popular stocks that's usually the case, but with more obscure stocks it might actually not be possible to buy/sell them whenever you want because nobody wants to sell/buy them. Also, your actions do not influence the stock market. But again, as someone with "just" a million to invest, your influence on most mainstream stocks would be negligible).

When you don't want to wait, you can also do that retroactively by using historic stock prices. Apply your system to the stock prices from 5 years ago, and see how much money you would have if you followed your system until today. But when you do that, then it is important to only use stocks which you did not consider when you formulated your hypothesis. Otherwise you are picking stocks you already know will conform to it, which is a pretty useless method to prove a hypothesis (known as HARKing among academics).

And you should also be aware that backtesting is a much weaker test than prognosticating. Anyone can predict the past. A theory is only useful when it can predict the future.

Answered by Philipp on February 13, 2021

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