Backtesting Trading Strategies

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 and having a consistent strategy that’s profitable will help you to get there. Any well-informed trader is not going to implement a tool that has not been tested. This is why we always recommend paper trading. With the aspects of paper trading you can back test to your heart’s content any trading strategies that you may learn about. Take our Thinkorswim tutorial to learn how to set up a paper trading account.

What Are Backtesting Trading Strategies?

  1. Here’s how backtesting trading strategies help:
  2. What your net profit or loss would be.
  3. What volatility you can expect to see with in that set of parameters.
  4. Expected averages with the strategy.
  5. The amount of capital to have the strategy play out with the highest probability.
  6. A good win-loss ratio.
  7. Ironing out any “kinks” in the system for the current market.

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

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

Software Is Important

backtesting trading strategies

The market is crowded with a large amount of stock trading software, techniques and tips. Many of the tools you will need 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. is a great resource to use when backtesting strategies. It will give you data all the way back to 1991. As a result, just about any environment you can think of, you’ll have information for. There are many other numerous back testing sites so don’t be afraid to do a quick Google search.

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

Techniques to Consider

There are many ways you could go about testing your new backtesting trading strategies. Some of the best techniques are to do it on a well dedicated program or on 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, if possible, do it on pen and paper to really 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 and can help shorten the learning curve you may have. 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 you have determined it is ineffective to your style and market (watch us do trading live each day in our trading rooms).

Remember Backtesting Trading Strategies

Like with anything in stock training, you need to 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 as when you break 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 in a productive way, either change it’s parameters or find a new strategy.
  6. Identify how much time you’re willing to spend on this strategy, time is money if you are spending too much time on a strategy that is showing no promise then it is the same has not cutting your losses quick on a bad trade

To Sum It All Up

backtesting trading strategies

Do not confuse movement with achievement – Jim Rohn

Just because you are spending hours backtesting trading strategies doesn’t mean it will be effective to your trading. You don’t want to spend hours upon hours on a strategy from the 90s when the fact is some of it may not work in today’s market. You need to be able 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 end up 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 then you could end up saving yourself hours of time.

A handy resource from the Bullish Bears community are the trading rooms where we post plenty of strategies and studies which we’ve already tested. Ask any questions you may have in the Bullish Bears chat room as many of us spend hours testing strategies. Do not just be busy but be productive.

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