I've been using technical analysis approach for several years right now and currently explore the algorithmic/automated trading techniques.
It seems that one of the most important aspects of creating strategies for automated trading - is the backtesting. However I'm not sure how reliable backtesting really is? I don't mean to raise the "Whether backtesting is a good way to predict future price moves?" issue, but just the technical side of it. What I am trying to say is that when a real time trading takes place, there are real time factors as well.. For example:
- Buyers/Sellers presence - in real world, there's always a possibility that your sell\buy order will be executed only partially (for example you were able to sell only half of the shares for a certain price).
- Response times - I'm not talking about HFT(High Frequency Trading), but while backtesting, the sell/buy order will always be executed, and executed immediately. However in real life it might not be the case.
So my question is basically as follows:
- I guess there are even more practical considerations I do not take into account due to my lack in experience and it could be great if someone named those..
- Is there any way (or need) to incorporate these factors into the backtesting?