Sensitivity testing

Sensitivity testing in backtesting is an analysis conducted to assess the impact of variations in the parameters of a trading system on its historical performance. The goal is to determine whether the system is robust and capable of generating consistent profits in different market scenarios and conditions.

In a sensitivity test, the values of trading system parameters such as stop loss levels, take profit, trailing stop, position size, and asset selection filters are intentionally modified, and their overall effect on the system's performance is observed. This allows for the identification of critical parameters and those with a lesser impact on the final outcome.

a man in a suit and tie is holding a pen and a pen
a man in a suit and tie is holding a pen and a pen

Some ways to conduct sensitivity testing include:

  1. Changing parameter values within a predefined range: Different combinations of parameter values within a specific range are tested to observe their impact on the system's performance.

  2. Utilizing different optimization methods: Various optimization techniques such as performance charting based on parameters or parameter scanning are tested to find the optimal combination of values.

  3. Conducting tests in different markets and conditions: The system is tested in various markets, time periods, and market conditions to assess its ability to adapt to unknown environments.

A robust and thorough sensitivity test is crucial to ensure that a trading system is effective and reliable in the long term. By identifying the most sensitive parameters and evaluating performance in different scenarios, traders can make informed decisions and minimize the risk of overfitting or curve-fitting.

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