Page 869 - How to Make Money in Stocks Trilogy

Becoming a Master: Continually Studying the Market 131

Don’t complicate the process by having too many rules. Focus on your
top one or two weaknesses. Remember, the point of your analysis is to for-
mulate your rules. Use your analysis to establish rules for yourself. Write
your rules down to reinforce them.

Back Testing
Lee Tanner does market simulations to compare how well he actually did
in a particular time period with what he might have been able to achieve.
He learned this technique from an IBD Level 4 workshop in 2004. He
says, “The great thing about back testing is there are no emotions
involved, but one can practice what they might have done in similar mar-
ket circumstances.”
To do his analysis:
1. Lee goes back in time, using the date change feature in MarketSmith,
to a time period shortly before a new market rally started and builds a
“theoretical” watch list of stocks as objectively and realistically as possi-
ble by using:
• His old watch list of stocks that were setting up, as well as notes or
IBD articles that he saved from that time period
• eIBD features from the time period, especially the IBD 50, the Big
Cap 20, and the 85-85 index
• Stocks that were on Leaderboard at that time

2. Lee goes through the market and the stocks that are on his theoretical
watch list day by day, week by week, looking at charts and trying to find
the big winners. He finds this part of the simulation particularly useful
because he can see the charts as they looked at the time, not as they look
in the present.
Lee makes simulated buy and sell decisions for stocks in the theoreti-
cal portfolio the way he normally would in real time while keeping a
record of:
• All the watch list stocks for each week of the simulation that were
bought and put in the theoretical portfolio
• The market direction for that time and the distribution day count dur-
ing the simulation