There are different approaches to testing of advisers. Every trader, certainly, has his approach to testing of mechanical trading systems. This article will be useful for beginners who have not yet formed an opinion about the testing methods.

During the development of mechanical trading system, as a rule, there is the optimization of the system, selection of parameters, the addition of various conditions and filters. It is a common practice among traders using mechanical trading systems. Then, necessarily, there is the testing of adviser.

The most common way for traders-beginners is testing of all quotations available in the history, because it is believed that the more the gap, which tested the system, the better. Having optimized the system on the history available to the trader, he thereby deprives himself an opportunity to test the so-called «out-of-sample», ie when the system is run on historical data that did not participate in the optimization. The trader has to check of the performance of the system in this case on a demo account in real time.

This method has its pluses and minuses. From the benefits I can highlight that for optimization it is used the greatest number of available bars of the history. And the longer the adviser had been tested, the more sales it will make during this period. Well, the more transactions, the higher the reliability of the results is. There is only one minus – the inability of the trader to test the system on historical data, which did not participate in the optimization.

Perhaps many experienced traders say that the test “out-of-sample” for absolute certainty must be conducted on a demo account in real time, and they will be right. But such testing would require a lot of time – several months or even years, for a novice trader, as indeed for a trader with experience, it’s just not realistic. And yet, after such testing, the trader may receive a negative result, and the time is lost. To avoid this, it is better to use the second method of testing.

To use the second method of testing the system, a trader needs to break all the available history into two segments – long and short. On the long stretch it is done optimization and setting of the system. At short distance, it is done test “out-of-sample”. A long section contains approximately 80-90% of all available quotes in history. Each trader can decide for himself what part of history and for what must be used.

The principle of testing is very simple – first, on a long section it is done the optimization of the system. After receiving the results, we choose the most reliable ones and start testing the system on the same long stretch. Thus, we obtain the values of all parameters of the system – profit, profit factor, drawdown, the number of transactions, etc., which actually describe the behavior of the system in history.

Now we run the same system on the second – a short period, which was not involved in setting up the system (in fact this test is called “out-of-sample”). Having tested the system in this way, the trader will receive the new system indicators – income, profit factor, subsidence, etc.

All that remains now is to compare, how the system behaved in a long section where there were setting of the system and how it behaved in a short period of testing “out-of-sample”. The system should show similar results. If at least one parameter of the system is much worse, then we can assume that it is non-operating or can perform additional tests for authenticity.

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