Thermodynamic Automaton Computer
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Founder, TWIST POOL Labs · TAC Research · NanoCERN Unit, Pune
First-principles finance educator · 10+ years in Indian capital markets
Most traders in India operate on “Hope” and “Gut Feeling.” They see a stock go up, they feel a “vibe,” and they buy. This is the fastest way to increase the entropy of your bank account (i.e., make it go to zero).…
Most traders in India operate on “Hope” and “Gut Feeling.” They see a stock go up, they feel a “vibe,” and they buy. This is the fastest way to increase the entropy of your bank account (i.e., make it go to zero).
In first-principles terms, Backtesting is the process of Reducing Subjectivity.
Instead of guessing if a strategy (like buying a Hammer at a Support level) works, you use a “Time Machine” (Historical Data) to see how it would have performed over the last 5 or 10 years.
If a strategy didn’t make money in the past, it almost certainly won’t make money in the future. Let’s learn how to scientifically validate your ideas using TradingView.
1. The Core Concept: The “Sample Size” of Truth
A single winning trade is luck. 100 winning trades across different market cycles is a System.
First Principle: Your goal is to find a strategy with a Positive Expectancy.
- Formula: `(Win Rate × Average Win) – (Loss Rate × Average Loss)`
If the number is positive, you have a “License to Print Money.” If it’s negative, you are the one being printed.
2. Manual Backtesting: The “Bar Replay” Method
This is the best way for beginners to learn. TradingView has a feature called “Bar Replay” that allows you to delete the future and play the chart candle by candle.
The Workflow:
- Define Your Rules: Write them down. Example: “I will buy only if the RSI is < 30 and a Hammer forms on the 1-hour chart."
- Go Back in Time: Scroll back 1 or 2 years on a stock like Nifty or Reliance.
- Play the Chart: Click the ‘Play’ button. When your setup appears, “buy” it mentally.
- Log the Result: Create an Excel sheet. Record the entry price, exit price, and whether it was a Profit or Loss.
- Analyze: Do this 50 times. Calculate your Win Rate.
3. Automated Backtesting: The “Strategy Tester”
If you can write simple code (Pine Script), TradingView can backtest 10 years of data in 3 seconds.
How to Use It:
- Go to the ‘Strategy Tester’ tab at the bottom of TradingView.
- Search for pre-built strategies (like ‘Moving Avg Cross Strategy’).
- Look at the “Profit Factor”: Anything above 1.5 is excellent.
- Look at the “Max Drawdown”: This is the maximum amount of money you would have lost in a row. If the drawdown is 40%, can your emotions handle that?
4. The 3 Killers of a Backtest (The “Friction”)
A backtest on paper is always better than reality because of Friction. To be rigorous, you must adjust for:
- Slippage: In a backtest, you buy exactly at ₹100. In reality, you might buy at ₹100.10 because of market speed.
- Taxes & Charges: GST, STT, and What is SEBI? charges eat 0.1% to 0.5% of every trade. If your strategy only makes 0.2% profit per trade, you are actually losing money to the system.
- The “I am not a Robot” Factor: In a backtest, it’s easy to stay calm. In a real trade, when Nifty drops 2%, will you actually follow your rules?
Summary Table: The Backtesting Checklist
| Metric | Target | Why it matters |
|---|---|---|
| Win Rate | > 50% | Gives you the confidence to keep trading. |
| Profit Factor | > 1.5 | Shows that your wins are much larger than your losses. |
| Max Drawdown | < 15% | Ensures you don’t go bankrupt during a “losing streak.” |
| Sample Size | > 50 trades | Statistically proves that the results aren’t just luck. |
The “Smart Friend” Advice
Backtesting is the bridge between a “Gambler” and a “Professional.” If you haven’t backtested your strategy, you are just donating your money to those who have. Treat your trading like a laboratory, and the market will treat you like a scientist.
Now that you can validate your strategy, let’s look at a “Floor and Ceiling” tool that professional intraday traders use every morning.
Move to C2 Spoke 11: Pivot Points: Finding the Market’s Daily Navigation Levels to master daily trading levels.
Frequently Asked Questions
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.
See the detailed answer in the section below — this post covers it with first-principles derivation and Indian market examples.