Introduction
Today we're doing a backtesting session. We're backtesting January 2020, starting with a $10,000 balance, and we're going to see how much of a percentage return we can make.
How I Backtest
Working Top Down
The first thing I do when I backtest is always start from the higher time frame and work my way down: the daily, the 6 hour, the 4 hour, the 1 hour, the 90 minute, the 30 minute, the 15 minute, and so on. I always work top down.
The Five Components
I also follow five components, in this order:
- Draw on liquidity (DOL): the level price is expected to trade toward. This is always step one: identify the draw first, starting on the daily.
- Profile: whether the profile on each time frame aligns to trade toward that draw. The daily profile can align while the 4 hour profile does not, for example when price is too high into the range with no new 4 hour swing point.
- Key level: the level price trades into, where we look for the swing that takes us toward the draw.
- Crack in correlation (CiC): the SMT or PSP between the correlated assets that confirms the swing at the key level.
- Entry: the lower time frame entry signature that gets us on side, toward the draw.
These are the five components that really define The Lathyrus Model and the process I follow, so they are what we focus on and keep in mind throughout the backtest.
The Backtest
The backtest was conducted live, so please refer to 0:45 in the YouTube video accessible on the right-hand side of this page.
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