I developed two years ago a simple trading system that showed great results in back-test.
This trading system showed 70% winners and an annual gain of 850%.
I was very happy and was thinking i found the ultimate system.
Everything was correct and i double checked everything, but when i traded this system, it was clear for me that i the system cannot be traded :(
So first let me explain rules of this trading system.Its was a long day trading system.
The rules was simple :
- 10% of capital for each position.
- buy a stock when it's 5% down from the open price.
- Stock must have more than 100 000$ average dollars volume per day.
- some others rules but i forget them.
The important thing to focus on is the second rule.
Do you think its correct ?
Of course yes, but the back-testing results was completely incorrect because of something that happen all the time to stocks that don't have enough liquidity (stocks with 100 000$ average dollars volume per day is not a liquid stock).
With an example it should be clear :
A stock open a 10$, then after 1 hour it is at 9.98$, one minute after that it drop to 9.4$ (-6%) for a second then it come back to 9.98$.
What happen here is due to lack of buyers at that moment, a single sell order make the stock drop quickly but when that happen quickly a new buyer come and make the stock up again.
Of course you will not have enough time to buy at 9.4$, even at 9.5$ so you will miss the trade.
The back-test don't miss that trade and show a performance of about 6%.
When in a simulation lot of theses kind of trades are picked, this will mislead the back-test results.
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