Backtesting Trading Strategies

Backtesting Trading Strategies Explained

5 min read

Did you know backtesting trading strategies are a very important part of trading? How do you know if your trading strategy works without testing it? The way to be a successful trader long-term is to have your wins outweigh your losses; a profitable, consistent strategy will help you get there.

Any well-informed trader will not implement a tool that has not been tested. This is why we always recommend paper trading. With paper trading, you can backtest any trading strategies you may learn about to your heart. 

Backtesting Trading Strategies Software

Backtesting trading strategies can yield valuable feedback from any given strategy. Using your set of parameters from a strategy you found on social media, trading services, or a trading book will give you the best results. Backtesting allows you to find data.

All of these are very important factors in trading. Backtesting your new ideas allows you to tweak and adjust your ideas without losing money. We always say you must be confident with your trades; backtesting builds that confidence.

Software Is Important

The market has many stock trading software, techniques, and tips. Many tools for backtesting trading strategies are built into some of the most common trading platforms. If you are using the TD Ameritrade thinkorswim platform, their paper trading system is great for backtesting.

Stockbacktest.com is a great resource to use when backtesting strategies. It will give you data back to 1991. As a result, you’ll have information for just about any environment you can think of. There are numerous other back-testing sites, so don’t be afraid to do a quick Google search.

The main things you want to look for in backtesting software are a large database, several adjustable parameters, and easy-to-read feedback. You want something that is very user-friendly. Having all these new strategies to sift through, you last need a complicated testing platform.

TOOLS
Stock Trading Companies and Brokers Stock Trading Tools List of Stock Market Books
DESCRIPTION Trading companies list that includes free trading brokers, day trading brokers, futures trading, and investing brokers
Trading tools list that includes stock scanners, charting software, journaling, apps, and simulators Stock market books list that includes the most popular day trading, swing trading, and options trading books
BREAKDOWN

Techniques to Consider

You could go about testing your new backtesting trading strategies in many ways. One of the best techniques is to do it on a well-dedicated program or pen and paper. However, doing it on a well-dedicated program will allow you to explore more ideas.

Once you have those ideas honed in, do it on pen and paper to set it in your mind. Another part of backtesting trading strategies is to ask the community. They may see something you haven’t, especially when trading low floaters.

Some people may have already tried the strategy, which can help shorten your learning curve. Anything you can do to save time will help you in the long run. Time is the one parameter that is always working against us.

Use these simple techniques to help build yourself as a trader. Do not be afraid to ask questions, as that is the overall purpose of backtesting trading strategies. Write down in your trading journal when you tested the strategy and what the outcome was.

The biggest hassle is inadvertently retesting the same strategy after determining it is ineffective for your style and market.

Parameters

Like anything in stock training, you must have a set of parameters. Having a set of rules to go by allows for a solid baseline to test with. Breaking these rules should hold consequences like breaking your rules in trading.

  1. Write everything down so you can keep accurate track of what you’ve done
  2.  Have a solid goal in mind before you start the back-testing
  3. Do your due diligence to see if the strategy has been tested before and what the results are; in doing this, you could end up saving yourself much time
  4. When you have questions you cannot answer, ask the community
  5. If your strategy isn’t performing productively, either change its parameters or find a new strategy
  6. Identify how much time you’re willing to spend on this strategy

Final Thoughts: Backtesting Trading Strategies

Do not confuse movement with achievement – Jim Rohn

Just because you spend hours backtesting trading strategies doesn’t mean it will be effective for your trading. You don’t want to spend hours on a strategy from the 90s when some may not work in today’s market. You need to identify what’s valuable for today’s market and what’s obsolete.

Don’t test strategies during your defined trading hours. Save backtesting for the off hours. If you’re trying this new strategy you think may work, you can end up costing yourself a lot of money or missing the move.

Look into all of the strategies that have already been tested. Chances are the idea that you are having has already been tested. If you can find the results from somebody else’s previously tested material, you could save hours.

A handy resource from the Bullish Bears community is the trading rooms, where we post plenty of strategies and studies we’ve already tested. Ask any questions, as many of us spend hours testing strategies. 

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