Back-testing with screeners at TD Waterhouse Discount Brokerage

"The theory of back-testing is that any investment strategy that worked well in the past is likely to work well in the future.

Conversely, any investment strategy that performed poorly in the past is likely to perform poorly in the future."   

-Richard Wilks

Customers of TD Waterhouse Discount Brokerage are now able to back-test the performance of their investments, thanks to enhancements announced this past  October to TD’s popular “Screeners” tool.

“Screeners” have been available to TD Waterhouse Discount Brokerage customers since November 2008.

Back-testing uses “Screeners” (or filters) to go back in time and see what your returns might have been, based on specific selection criteria, to test an investment strategy. TD’s “Screeners” are user-friendly and use pull-down menus and sliding rulers.  

“We are the first major bank-based online brokerage in Canada to introduce back-testing to our customers,” says Richard Wilks, assistant vice-president, Business Solutions Delivery for TD Waterhouse Discount Brokerage.

Partnership with Recognia
TD’s back-testing tool was built in partnership with Recognia Inc., and was in development for about nine months. Ottawa-based Recognia, was founded in 2000, and is now a leading provider of investment research, boasting 20 million provisioned accounts worldwide. 

In short strokes, the theory of back-testing is that any investment strategy that worked well in the past is likely to work well in the future, and conversely, any investment strategy that performed poorly in the past is likely to perform poorly in the future. The goal, of course, is picking winning stocks.

“Back-testing is like reviewing old exams before you write your own exam,” says Wilks. 

There are about 15,000 stocks available globally. So, how does an online investor or online trader narrow that down?  How do you come up with investment opportunities? You can realistically watch 20 stocks, 30 tops.  

Some stocks you’re already familiar with, some stocks are mentioned by the media or analysts, others you may learn about over time, others still you never hear about. That’s where “Screeners” come into play.

“The ‘Screeners’ tool allows you to look at the universe of stocks and, based on certain filters that are important to you, get a smaller sample of stocks that fit your criteria,” says Wilks.

Screeners may spot opportunity
Your search might use the following “Screeners” to help you narrow down investment opportunities:  Canadian stocks only;  companies with capitalization between $500 million to $1 billion; stocks that pay a dividend of 5 to 10% per year;  and amount of dividend represents 40% to 60% of their net income.

Let’s assume you’re going back in time 12 months. Then, you hit the “Back-test” button. The “Screeners” tool gives you the top 10 companies that fit your selection criteria. 

“The ‘Screeners’ calculate that you would have either beaten the market [using an index to measure against] or it wasn’t that great a return,” says Wilks.

TD customers are also able to tweak the “Screeners” to optimize their returns. “Screeners” searches can also be saved for future reference. Plus, customers can also set up e-mail alerts when there is a change in companies that meet their selection criteria.

Thinking still required
“Back-testing is a good tool for understanding the past, but not necessarily the tool that enables you to come up with a list of potential companies to invest in, in the first place,” says Wilks.  Independent critical thinking is still required.

Kelowna, B.C.-based online trader Tyler Bollhorn, 39, has a slightly different take on back-testing. Back-testing cannot predict the future based on the past, but it can give you a probability of an investment strategy’s success rate.

“In talking to many traders over the years, 90% of them don’t back-test,” says Bollhorn. For Bollhorn, that’s a critical mistake.  

Entirely self-taught, Bollhorn is the founder of Stockscores.com, a research and analysis website for traders. A subscription to Stockscores.com is about $15 per month;  customers of Disnat Direct online brokerage get Stockscores.com for free.  

Here’s one of his strategies. “If a stock has had two months of ‘sideways’ [flat] trading, and then it has a breakout with abnormally high trading volume, that stock has a 68% chance of going into an upward trend. I have back-tested this and know it to be true,” says Bollhorn.