If you’re into stock trading, one of the first things you should really look into is back testing trading systems. 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 trading plan 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- The best results come with the best software.
Good back test results can only be achieved through good software. Majority of reputable charting packages have their own testers that you can use. Having a good charting tool however does not necessarily mean that the testing tool that comes with it is excellent as well. Some testers can’t test a system across a portfolio. You need to find one that can because you will eventually be moving in this direction.
#4- No system can perfect a test.
Some people approach testing with the notion that they can refine their systems well enough to get them perfect. This is an absolute myth. There is just no perfect trading plan on earth and no test can help you get that. What you should really be after is a plan that can ensure only small, occasional losses.
You just can’t skip back testing simply because money is at stake here. If you don’t want to have to let go of all of your trading capital, you need to get deep into the task of testing your trading plan.
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