Back Testing- Refining Stock Trading Systems
There’s one thing you need to absolutely know about stock trading systems. You need them if you ever hope to earn well from the stock market. It should be obvious that you stand more to gain if you have a set system that will tell you when to make an entry or exit based on the criteria you are most at ease with.
One question still stands though. If a system is all it takes to succeed, why do some investors still hit the dirt? One possible answer for this is the lack of back testing. You can’t just start using a system. You need to make sure first that it will be good enough to give you some winning trades. Back testing is important even if you are following a system that a lot of other successful traders recommend.
It’s not too hard to understand the concept of back testing. This is simply a way of running a trading system through a set of previous trading data. With back testing, you will be going through the process of trading without actual money involved and only with historical data of certain assets. Back testing is crucial because it is what will help you find out if you have a chance of earning well from a system.
There are other advantages to testing. With the data that you have on hand from testing, you can tell what the weak points are of your stock trading system and how you can fix such elements as entry, exit and risk management to get more acceptable outcomes. Once stock trading systems pass back testing with flying colors, investors become more certain that they are on the best path to success. It is unlikely that they will feel the need to jump from one system to another.
There are two ways to go through back testing. You can either perform a manual test or you can use software. It’s perfectly alright to do things manually. You will however be saving more time and effort if you used an automated testing tool. You just have to identify specific testing criteria, supply historical data and leave your tool to do all the hard work.
The only taxing part about deciding to use software is picking one option among the many available choices. Some creators of trading charts packages offer built in testing software. It is however, often a better idea to choose software that is compatible with third party data providers. This is to make sure that you get the kind of data and features that you prefer from a data provider.
Don’t think you’ll immediately get good results after you’ve tested your trading plan. Before you actually start using it, you need to analyze the data that you have. Some traders just base their decisions to use specific systems or not based on the factor of profitability. A good trader analyzes such figures as expectancy, win-to-loss ratio, maximum consecutive losses, average wins, average losses number of trades performed and maximum drawdown.
Stock trading systems truly are your passport to trading success. Don’t just follow a plan blindfolded though. Take the time to test it to see if it has a good chance of working to your advantage.
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