What Everybody Ought To Know About Back Testing Software

Back testing software is an integral cog in the process of analysing trading systems. Back testing is the process of testing a trading strategy using historical data rather than testing it in real time with real money. The metrics obtained from testing via back testing software can be used as an indication of how well the strategy would have performed had it been applied to past trades. Interpreting these results then provides the trader with sufficient metrics to assess the potential of the trading system.?

While you aren't going to get results with pinpoint accuracy, you will at least have some idea as to whether or not it is a good trading strategy. You will also know what sort of results you can expect to see when you proceed with the given strategy.?

One thing to ask yourself is whether or not you will be able to examine the progress of a system over a period of time. You can do this, either by yourself, or with the use of a piece of software. Frankly, it is best to do this with a piece of software, as doing it manually is very time consuming, and it is difficult to tell whether or not your results are actually accurate.?

Back testing software can be quite beneficial to you. It will let you test your system, and overall it's going to save you a lot more money, covering your initial investment in the back testing process. If you want your trading system to be a success, you will consider investing in this.

Mechanical Back Testing

Keep in mind that if your mechanical trading system works exclusively with price data, back testing software will be a viable option.

Let's talk about this for a moment. Perhaps you devise a mechanical system that uses this entry rule:

Buy a security as the ten day moving average associated with the closing price passes over the thirty day moving average.

Using this rule with historical data, it can be tested out fairly easily. If you buy signal rule however, it will be a bit more complicated:

Purchase a security when the 10-day moving average of the closing price crosses above the 30-day moving average of closing price and the PE ratio was 75% or lower than its value three months before.

This rule introduces data that is not often supplied or maintained in a database of price information. To successfully back test this would involve obtaining historical data of a security as well as the price-to-earnings ratio (PE ratio). Typically, historical data on a group of equities would only include the open, high, low, close and volume for each period. Because of this limitation, many mechanical trading systems are designed around purely price technical indicators.

The biggest issue is that many investors cannot use the mechanical trading systems because of the lack of historical data. This data is needed to complete the back test.

Back testing software

Most chartering packages right now have their own back testing tools built in. If you followed the steps in the last chapter, then you should have no trouble choosing a decent charting package. Having followed it completely, you have more than likely either found a package that includes the software, or can at least interface with a good piece of back testing software.

One of the more realistic programs is TradeSim, which has the ability to back test and evaluate a trading system quickly and accurately. It doesn't matter whether it is one security, or many securities.

I believe back testing is the only way to remove self-doubt. Once you have established that you have a reliable and robust trading system only then will you be confident in trading it.

Your trading system however will not thrive unless you choose back testing software that is reliable and rock solid. In addition to it's stability, make sure that you are able to learn it and take full advantage of it's features.