Today we will discuss the concept of price back testing. This phenomenon happens on all time frames and is often the pinnacle of reversal traders like myself. As price moves away from the "mean" whether of trend or a consolidation phase, price has a tendency to revisit / back test these areas.
Below are screen shots of back tests that occurred at different times frames. Since the markets are fractal these occur on bigger time frames and smaller time frames.
Below is an illustration of ES futures back testing higher time frame levels:
A few things to observe here :
- ES bounced off the 5630 on 7/11/2024
- ES later came back and bounced once again at 5630 7/17/2024
- ES broke below the level aggressively 7/19/2024
- ES then came back and "back tested" the same zone there after on 7/22/2024 before continuing its trend
The key components here are:
- Price must be tested 2x minimum (to validate the zone)
- Price must aggressively break above / below the validated zone in order to leave "room" for a back test to occur
Back tests are by no means indicative of a trend or validation of a trend alone they are simply reference points and behaviors the market tends to do since markets most times are "mean reverting" and constantly cycling in and out of trends + consolidations' and "back test" areas for many different reasons.
Our job as traders is to identify these behaviors to identify opportunities to look for reversals and target zones or use them as a reference to "lean on" to validate a trade idea or hypothesis.
Below will be an example of a short term back test zone from a recent trading session back on 8/5/2024 that I took during one of my live stream sessions here!
The level on the ES was the 5200 zone and it was definitely a "zone" due to the amount of volatility we where experiencing at the time so it was "fuzzier" than normal so in theory it could've been 5220-5200 as the VIX was trading at an astounding 60 and markets where during pre market 3-5%
The trade idea was a reversal trade that price would "mean revert" back to the back test zone of 5200 from pre market with a long at 5160 as the trigger once I saw the flow of the DOM (Depth of Market) had shifted and we were not revisiting the lows of 5120.
A few things to observe here :
- ES bounced off the ~5200 Pre Market around Midnight PT
- ES later came back and bounced once again at 5200 ~4hrs later
- ES broke below the level aggressively ~1 hr later
- ES then came back and "back tested" the same zone ~2 hrs later at around 6:30am
The key components here are:
- Price must be tested 2x minimum (to validate the zone)
- Price must aggressively break above / below the validated zone in order to leave "room" for a back test to occur
Below is the illustration:
All the entries and live commentary will be found in the video in the link. Or at the end of this blog post for convivence.
Below is yet another example of ES back testing levels that we broke out of back in early June where price gapped up out of and never revisited until about a month level and held 2 x times before doing a very similar structural break as we did in August after breaking down from 5630s.
A few things to observe here :
- ES bounced off the 5450 in early June (6/11/2024) breakout
- ES later came back and bounced once again at 5450 7/25/2024
- ES broke below the level aggressively after the 2x test on 8/2/2024
- Now what comes next . . .
The key components here are:
- Price must be tested 2x minimum (to validate the zone)
- Price must aggressively break above / below the validated zone in order to leave "room" for a back test to occur
In Conclusion:
The concept of back testing is not a strategy at all but simply a reference of a structural behavior the market has a tendency of doing time and time again from a micro to macro perspective. These things can help reversal trader's like myself find opportunities for mean reversion style of trades when coupled with other concepts in order flow such as the (DOM) and Foot print charts explained in my other blog posts can help validate and provide more color.