Once we know the patterns' occurrences and efficiency based on the statistics calculated by CandleScanner, we can go a step further. Specifically, we can backtest our trading ideas, using the entry and exit signals we found in the candle patterns. In other words, we can quickly replicate transactions using the identified candle patterns on historic data. The anticipation is that in conducting a test on past data, and arriving at encouraging results, this will repeat in the future. In other words, future performance will resemble past performance, based on similar patterns of candles. There are many aspects and issues which need to be considered when undertaking a thorough and realistic backtest. Here we provide a few basic ideas and an overview of some of the capabilities found in CandleScanner.
CandleScanner allows the user to build a trading strategy without the necessity to write any code. Using a simple user interface you can define your entry signal (pattern) and exit signal (stop-loss, trailing-stop and take-profit). All these building blocks are parametrized, i.e. you can adjust them so they meet your requirements.
You can also optimize your trading system, meaning you can define a range of parameters for different building blocks of your system, and CandleScanner will find the optimal values of those parameters.
For example, you can define a minimum and maximum allowable value defining the width of the trailing-stop used in your trading system. You specify the step (increment) value which will be used by CandleScanner to calculate a set of parameters defining the width of the trailing stop. Every parameter value is then used by CandleScanner to perform a backtest. If more than one parameter is optimized, CandleScanner uses all possible combinations of parameter values, and, for every single combination, performs a backtest. At the end of the optimization process CandleScanner presents the list of results which can be sorted or filtered, as required.
Backtest results contain many metrics which can help you to see how your trading idea(s) performs. You can also export backtest results and process them, for example, in a spreadsheet or some more focused software dedicated to trading system analysis.
Another nice feature of CandleScanner is that every single transaction from the backtest can be displayed on the chart, showing all the most important components such as entry point, stop-loss and trailing-stop/take-profit.
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