Backtesting results can be distorted with Look Ahead Bias when trading decisions are based on information that is not yet available. This generally happens because extra data is accidentally included and we simply don’t realize it.
These errors are often very slight, which is why they are so easily overlooked. They can, however, have a dramatic impact on the overall results.
Here’s an example
Only daily highs and lows available to you in your backtest data but you decide to build a system that bought at daily lows and sold at daily highs. Seriously, wouldn’t this be the system of all systems? It would be a machine for printing money. Problem is, in reality, you don’t know the daily high or low until the end of the day. Whereas when babacktesting you do know. Although this seems like a silly thing to do, let me assure you when you are in the midst of developing code, it is a very easy issue to overlook.
Here at QiT we have a process for developing new algorithms and one of the steps is to sniff out any kind of look-ahead biases.
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