Backtesting Using Tick Data - is it relevant - when and how to use tick data
Søren Lanng, Financial trading without programming - Founder at ECO Group
Saturday, June 18, 2016
There has always been the myth within strategy backtesting, that if you do not use tick data, you are not a real developer, or you do not have a reproducible result. This is true, but also false.
To backtest using tick data is only relevant if you exit a trade on a profit level, ie not at a bar close.
The problem to solve:
if you have a profit taking outside a bar close, then you need to call the strategy at each tick ! If you have 20 strategies running on 20 different instrument, mean your platform will be very very busy.
A solution is to add the spread to the bar close, and not use profit taking outside a bar close. But using for example 1 minutes bars is too risky, since a lot can happen within a one minute bar. Which mean we need to use range bars, but traditional range bars trigger a train of bars on a move, or price jumps, do not provide the important information of sideways trading to our technical indicators.
So the solution is our proprietary TR bars timeframe - which is a combination of using minute bars, and range bars, (combined bars chart) with the adjustment that only one range bar is printed on a move, not to have a train of range bars.
The above imply we need the tick data to make the range bars, but we do not trade/backtest on every tick.
Attached a M1R40 chart, 1 minute combined with 40 tick range bars - which also happens to hold the spread information at each closed bar, since this is clearly needed. Blue candles are range up bars, yellow candles are range down bars. Green and red 1 minute bars.
Using the TR chart, you catch both the fast moves and the sideways moves, provide about 30% more information, and do not spoil the technical indicators on sudden moves.
www.ecom.onl/ECOportal/