Backtest Methodology

Input Data

The backtest draws on our history of stocks in cup-with-handle (CwH) chart patterns back to December 2004. Although we have watchlist data back to April 2003, the pattern detection algorithm only became stable in late 2004. The data used in the backtest is:

every symbol that appeared on the CwH watchlist by date including the breakout price by date adjusted for splits
daily open, high, low close and volume data for all symbols adjusted for splits.

Opening a Position

The back test begins on the start date you entered and then proceeds to evaluate potential buys on each day as follows:

If there are portfolio positions open (as defined by your 'number of positions') the backtest selects all watchlist symbols for that date that meet your minimum conditions for purchase. To be considered, the high for the day must exceed the breakout price (BoP).
If there are no symbols meeting your conditions, the simulation moves to the next day.
If there are symbols meeting your conditions, a position is opened taking the highest RS Ranked symbol first. The number of shares purchased is a function of the number of positions open and available portfolio cash. For example, if there are 3 positions open, the simulation allocates 1/3 of the available cash to the purchase.
If you specified 'Buy on Alert' the BoP is used as the basis for the purchase.
If you specified 'Buy on Confirmed' the purchase is made using the next day's opening price provided the symbol closed at or above the BoP and met the minimum volume to average volume ratio requirement.
As the portfolio is added to, the number of available positions is decremented.
Each position opened is added to the transaction log.

Closing a Position

Each position in the portfolio is evaluated each day against the sale conditions you specified:

If you chose the 'Buy on Alert' strategy and the volume on the buy date did not meet the minimum volume for a confirmed breakout (from your minimum adv ratio parameter) then the position is closed at the next session's opening price.
For BoP stops and trailing stops, if the low of the day is lower than the stop value the position is closed at the stop value.
If the high on any day exceeds the target gain %, the stock is sold at the target gain % price.
If the maximum hold days is reached, the stock is sold at the close on that date.
When a position is closed the sale proceeds are added to the available cash and the reason for the sale is logged in the transaction log.

Daily Accounting

As the simulation proceeds day by day, the current portfolio value (shares and cash) is logged to the transaction log.

Reporting

At the end of the simulation a comprehensive report is produced including charts and the transaction log.

Backtest Limitations

The backtest does not take account of broker commissions or slippages. While every effort has been made to ensure the backtest is a fair simulation of how trading would have occurred, it does not include discontinued symbols. Historical breakout prices and volumes have been adjusted for splits so these are consistent with the split adjusted OHLCV history. Consequently, the actual price at which a stock may have traded in the past is not necessarily reflected in the data but the percentage gain/loss on any particular trade will be substantially accurate.

The backtest results are strongly influenced by the sequence in which breakouts occurred. The exact sequence cannot be repeated in the future so future results will be different from the simulated results. The effect of this sequencing can be seen by varying the dates and length of the simulation. The effect of sequencing is most evident when choosing a position limit of one and least evident for a position limit of twenty.