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Why Data is Critical in Algorithmic Trading - Setting Up Micros in Multicharts


While overnight gaps are normal, massive intra-day gaps in the stock index futures are not. While re-testing one of our trading systems in the Micro Nasdaq in Multicharts, there were many trades with much larger winners than our profit target and much larger losers than our stop loss. This is a day trade strategy so we are not subject to losses based on overnight gaps for the V-Reversal trading system.


Making sure data is accurate in the platform is one of the most critical steps in testing a trading system. When reading about Jim Simmons from Renaissance technologies and other algorithmic trading pioneers, the process for gathering data and verifying it, along with backtesting, was much more tedious.


Even when I started in the 1990's, I had to purchase back adjusted historical data from one vendor and then get live quotes from another vendor. It is much easier now but we have to make sure that the data is accurate so that we do not get fictitious results that could be much better or much worse.


Right now, we are re-working our process for Level II strategies such as Proteus. Making sure order book data is accurate without delay is challenging and what we see in market replay would simulate real time data with no delay while actual live trading introduces delays with computing bottlenecks and transmission line delay in the data that can give us different results.


The trading systems that we use in our portfolios are not sensitive to these minor delays using Level I data other than the slippage factor.


One of the biggest clues that will tell you if a trading system is accurately backtested is to determine if the largest losing trade is bigger than your stop loss or if the largest winning trade is bigger than your profit target.


We saw this scenario when backtesting our algorithm in Multicharts and show how to reload the data to fix any data gaps based on rollovers or incomplete data sets. We can do this in the Multicharts Quotemanager.


This is part of our setup for the Seven System Portfolio NQ and MNQ that we discussed yesterday in Tradestation.


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