The Idiots Guide To Back Testing For Confidence
After you`ve set your initial stop loss, chosen your
method for calculating your trailing stop loss, and
implemented all your money management rules, there
is one last thing you should do; you should begin back
testing your system.
With out back testing you will be headed in the right
direction, but you won`t know what to expect from your
system. Back testing will also give you the confidence to
keep going when you begin to experience the doubt that
every trader faces at some time.
Back testing your system is by applying the rules and
conditions of the system to the stock`s historical market
data. However, this is only possible if you`re trading a
system that is entirely mechanical and does not require
any human input to place the trades. How do you know
whether or not your system is completely mechanical
for back testing? Can you take down your trading plan,
the set of rules and guidelines that you follow, and hand
that over to someone else, who could then trade the
same system and receive the same results as you
would if they followed the system carefully?
If you can do this, you have a mechanical system that is
ready for back testing. If you can`t, you should look at
implementing a completely mechanical system.
Perhaps one of the hardest parts in trading any system
is to have the confidence to stick with your system. In
fact, a mechanical system almost forces you to make
decisions that are in direct conflict with what your gut
feeling might tell you to do.
Remember, our gut feeling tells us we should hold on to
losing stocks until they get to the break even point, and
our gut feeling would tell us to sell shares as soon as
we`re a little bit in profit. Obviously, a mechanical
system goes against these human tendencies, and that
is one of the reasons why it`s psychologically difficult to
trade. However, back testing a mechanical system, will
tell if you it your plan will work or not.
While back testing will not tell you with 100% accuracy
what the profitability of your system will be once you
start trading it, it will give you a very good sense of what
you can expect. All prices are driven by the same two
factors, supply and demand, in the present and in the
past. So, even though price movements are never going
to be exactly the same, in your back testing you will see
the patterns, and similar movements that show up over
time. With back testing you can discover the how
profitable you system is likely to be, and how often you
are likely to have a loss rather than a profit.
Back testing your system over different market
conditions, it can be reasonable to draw parallels as to
the performance of your system historically to its
performance trading it in real time. Knowing this,
because of back testing, will make it much easier to
stick with your system, and the profits you can
David Jenyns is recognized as the leading expert when it
comes to MetaStock and designing profitable trading systems.
His MetaStock website offers a huge free collection of trading
related tips and tricks. Gain free access now.
Click Here ==> www.meta-formula.com/subscribe