Back Testing Trading Systems - Four Facts You Should Know
If you're into stock trading, one of the first things you should really look into is back testing
. Sadly, not every trader puts as much importance on this as they should. Before you make any decisions about it yourself, there are a couple of important points about the procedure that you should clearly have in mind.#1- You can't skip tests and expect to win in trading.
You may have heard seasoned traders say that success lies mainly in having a trading system. In reality though, it isn't enough to simply have a system or plan in place. The real element that can make you a true winner is if you follow a system that has been tested. The key to winning big in the markets is to back test.
The plain and simple fact is that you can't expect to earn much if you don't get into this process. This is because it is in the tests that you get into that you are able to determine if a plan has a good chance of working well in current market conditions. Unless you make the effort and take the time to look in detail at your system, you will not get anywhere close to earning a decent income through trading.
#2- No actual money is involved in the process.
Aside from having to pay for the tool used for tests, there is no real huge cost involved in back testing. This is because in the actual process, there is no money involved. What actually happens during the procedure is that your system will be taken into historical trading conditions or situations. Results will then be presented on how well your system performed under these conditions.
You might wonder how such a process can determine the value of the system to current conditions when historical data is used. You don't actually need current data to see how well a plan will function. Tests using historical data will give you a good enough approximate idea of the value of your plan.
#3- Everything hinges on the software.
A successful back test relies on the kind of software that you use. Most charting packages have their own tool but some default tools aren't very good because they can't manage a system across a portfolio of assets. In real life, you will most likely be dealing with more than just one asset so you need a piece of software that can take a portfolio as a whole.
#4- There are no perfect results in tests.
There is no use trying to modify systems to reach perfect results. Perfection just isn't feasible or possible at all. You will never stumble upon a system that will give you a hundred percent success rate. What you should do instead is to get a couple of systems through tests and then pick that one plan that can give you minimal losses.
With so much at stake in stock trading, you can't afford to belittle back testing. Before you start your own trading account, running tests on your system is the one thing you can do to make sure you don't go down the loser's path.
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