The Role of System Testing

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  • on November 16th, 2010

Nicholas Darvas was a famed dancer in the 1950s who traded stocks in his spare time and wrote the classic “How I Made $2 Million in the Stock Market”, as described by Michael Carr.  Despite the gaudy title, I found it to be a fun and enlightening read and consider it a go-to source for momentum principles.  In reading Charles Kirk’s Weekender review, I came across this article by Thomas Bulkowski.  He walks through the methodology he used to test the effectiveness of Darvas Boxes.

I’m not here to debate the merits of a strict Darvas Box methodology.  No matter the objectivity we think comes with testing, we are still humans developing the rules and entering the data.  To learn more about his guiding principles, you may consider references by Michael Carr, Darvas Trader, or Daryl Guppy.

What I find helpful is the discussion of testing, both historical and forward, in developing one’s methodology.  I’m personally more of a forward tester, using historical testing to rule out a method but never to accept as proof of effectiveness.  After 10 years of trading on instinct, I spent a few years putting my ideas to the test and then experiencing the real-time results to feel the psychology behind a method.  This is great for testing the psychological robustness of an idea, but takes forever to execute.

With the resources available today, one can adopt best practices from those having gone through the process, and put their ideas to the test with a more thorough and objective set of instructions.  Here are a few resources that might help the aspiring system tester on a more efficient path to creating, testing, and implementing their ideas:

CSS Analytics “Measuring and Combining Edges” and “Bar Classification Scheme” and “Questioning Assumptions & the Wizard of Oz”

Rob Hanna of Quantifiable Edges discusses his path to testing with Charles Kirk

A list of FAQ for Meb Faber

Market Sci “5 Ways to Create Better Risk-Adjusted Returns” and “Transactional vs. Confidence-Based Trading Strategies”

You can also see regular posts from MarketTells, Woodshedder, SentimenTrader, and TradingtheOdds that may inspire you to dig deeper into the process. Michael Bigger had a great post recently titled “Where Good Trading Concepts Come From”.  David Blair shared a business plan as expressed by one of his students, an excellent exercise for traders of all levels.  The resources continue to appear…take the time to see what others have experienced in order to shorten your own learning curve.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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