How to Backtest Stock and Bounce Play

Why we need to back test stock?
Jack Angel shares: To know the support and resistance and to know when to buy or sell.

Why we need to back test?
Belle Layos shares

• learned about bounce trading first (from Money Growers PH)
• reference: ZF's Bounce  Plays 101, Kapitan Kidlat's 3 days to Kill, 
• back test to test mastery and trade setup
• backtest tools Excel to input data and Word to see charts

Belle Layos setup for bounce play

• previously trending with parabolic move
• 3 day declining rule
• previous Darvas must act as support
• Use Fibonacci retracement with bounce in 38.2%, 50% and 61.8% (From Jason Cam)
• Candle should not close below retracement
• Should have reversal signs like doji or weak candles
• Drying volume, should dry up
• Sell on the 3rd day of bounce

Then on an Excel table, she has the following columns

• Count on how many of the above criteria has been met
• Name of stock/ symbol of stock
• Date
• bounce point
• Fibonacci
• Previous candle
• Volume
• RSI
• AOTS (Alignment of the starts)
• Price as to Moving Averages e.g. below MA 20
• Bounce? Yes or No?
• Resistance
• Number of candles on bounce

Shapes of Boxes and Darvas

Continuing with my self-study of stock trading, I came across Darvas Box Theory

Lifted from Investopedia

• Darvas' trading technique involves buying into stocks that are trading at new highs 
• The strategy traces its origins to 1956, when Nicolas Darvas turned a $10,000 investment into $2 million over an 18-month period using this theory.  
• type of momentum strategy
• to determine when to enter and exit the market 
• If the price breaks out of the Darvas box, the investor takes this as a sign of a breakout

MoneyGrowers advise to use Dravas Box in  stocks with a.) 52 week high and b.) high volume.
How to plot: 1. highest point, check next forward 3 candles if this point is not superseded; this will be the top border; then 2. mark the lowest point in the next 3 candles.  The ends of the candles measured may be body to body or wick to wick.

Notes:

• Once the price pierces the upper border by 1-2% then it is a buy signal
• Stop loss price is the lower border
• Once the lower border is pierced, the lower border is plotted first before the top border
• After a series of making boxes, you have a price range

ZF wrote

• successful breakouts are usually in a form of solid long green candles with high volume
• break from the border sends the price flying or falling into the border's direction
• if the price touches the border but does not break it, the border is said to be tried and tested