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I know this has been asked before here, but Id like to extend the question further.

Lets say my entry price is 50, so at the start of the day I place a limit order bid 50 for 1 lot. During the trading day, the market collapses and I get filled on my bid. In a real world live trading scenario, my execution is going to be on the same daily bar at the price of 50. Even if I'm using 1 minute bars and that fill happens at 14:00 in real time, the data and prices at 14:01 are completely irrelevant to the trade and fill.

Furthermore, if I am already in a trade (lets say short @ 50s), and I place a stop-loss order at 80s and the market trades up through the 80s - Im going to get stopped out then and there, around about the price of 80s give or take some slippage. The next bar, whether it be daily, hourly or 1 minute, may open up at 150. A backtest that is going to execute that trade on the open of the next bar is now potentially waaaay out of sync with what would have happened in a real time live scenario.

I understand that any strategy that calculates its trading signals based off a bar's close can be subject to huge biases without enforcing the next bar execution. But for strategies that have predefined entry/exit signals (which I feel is going to be the majority) the ability to execute on the same bar is crucial!

In the post linked above, Josh Ulrich mentioned adding allowMagicalThinking=TRUE to the calls to applyStrategy and applyRules. However, I cant seem to find any documentation on it, and my implementation of it hasnt had any effect. What am I missing?

Call to applyRules: 

 test <- applyRules(strategy=strategy.st,portfolio=portfolio.st, symbol = symbols, mktdata=mktdata , allowMagicalThinking=TRUE)

Alternatively, call to strategy: 

out <- applyStrategy(strategy=strategy.st,portfolios=portfolio.st, allowMagicalThinking=TRUE)
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Ed Wilson
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1 Answers1

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allowMagicalThinking = TRUE causes execution to occur on the same observation as order entry. There is no way to force orders to be entered on the same observation as the signal that causes them.

If your signals really are pre-defined, you can include them in your mktdata object and shift them sufficiently so that execution occurs when you think it should.

I caution anyone who does this to double- and triple-check your results, because you're side-stepping almost all of quantstrat's built-in safeguards to avoid creating look-ahead bias in your backtests.

Joshua Ulrich
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  • Thanks for clearing that up Joshua. I think I will create a -1 lag for each signal as suggested. So when would `allowMagicalThinking = TRUE` make a difference if the execution occurs on the next bar regardless? Lastly, how can I find out more about the built-in safeguards? – Ed Wilson May 28 '16 at 02:07