If you have got not back tested your trading system, you might as well merchandise with your eyes close.
In fact, whatever technical analysis standard you utilize to merchandise with, be it moving averages, taper sticks, volatility breakouts, fibonacci retracements or any other trading system you have got devised you're going to need to endorse diagnostic prove your trading system thoroughly and objectively in order to take any possible uncertainty about it's capability.
To take any self-doubt you need to thoroughly back test or imitate your trading system in such as away that it fits the statuses under which it will be traded. Once you have got got established that you have a dependable and robust trading system only then will you be confident in trading your system.
When trading what is the inquiry in most traders’ mind?
To reply this inquiry I shall quote the introduction from Chapter 8 Back Testing of Mark Jurik’s book Computerized Trading:
Will my trading strategy be profitable? After having gone through the arduous procedure of crafting a trading strategy, these are the inquiries you must inquire yourself. The ability to reply these inquiries are the great promises that back testing throws out for all traders. A successful dorsum testing process will greatly reduce the chance that you will get trading with either an unprofitable strategy or one that makes not ran into your expectations. By adopting a sound and strict dorsum testing approach, you will:
Pinpoint which nears to the market that are likely to be successful and which 1s are not.
Generate good estimations of future public presentation for each trading strategy you test.
Make a record of your trading strategy's historical trading performance.
Produce information necessary for other constituents of your trading attack such as as your plus allotment strategy.
Important Trading System Criteria
Profitability is not the lone criteria by which a trading system should be evaluated. Drawdown and emphasis should equally be considered as well... for example, before you open up a trading account:
Are you satisfied that your system is reliably profitable?
Will drawdowns pass over out your account?
Is your system trading in a manner you can tolerate?
Can you tolerate long time periods of no trading or too much trading?
Can you tolerate a large twine of losses?
The lone manner to reply these inquiries is to subject your trading system to extended dorsum testing.
Lack of Confidence
Lack of assurance usually military units bargainers to inquiry their ain trading systems. They give into the enticement to modify their trading program with annihilating consequences. This enticement engenders on by a twine of losing trades or an chance to replace their trading system with a whiz-bang index that is usually talked about in bargainers confabulate forums.
Anything that sounds to good to be true volition attract the attention of a bargainer who is not satisfied with their ain trading system simply because they have got not properly tested their system in the first place. In addition, they have got not built up the necessary assurance needed to successfully merchandise the system developed.
In the end these negative subconscious mind ideas will only impede and destruct your ability to merchandise successfully. To better your assurance in your trading system you need to thoroughly and objectively back prove it - simple as that! Only then will you be confident adequate to perpetrate clip and money to it!
The Traders DilemmaHow can you prove how a trading system will execute over a clip period of time when trading an arbitrary grouping of securities?
--- To truly measure the past public presentation of a trading system you need a trading simulator, which mimes the day-to-day trading activities of a typical trader. Until now this sort of software have been out of the range of most traders. In fact, there have been some great headroom in back testing software. Personally, I utilize TradeSim with MetaStock.
TradeSim is the first realistic true trading simulator/analyzer for Metastock that tin quickly back-test and measure a trading system across a portfolio of securities. With its powerful information processing capabilities, TradeSim can measure the historical public presentation of a given trading system within a matter of proceedings and make it with a realistic mental representation of a real-life trading scenario. Whether a single security or a multiple security portfolio, TradeSim replies the simple question:
"What would of happened if this system had of been traded in the past using an arbitrary portfolio of securities?"
Sounds simple - but is extremely complex if not impossible to make with Metastock as it stand ups alone. However, with TradeSim it is just a simple matter of running a Metastock geographic expedition on a portfolio of securities using your ain set of indicators. When the geographic expedition have finished you just simply run TradeSim and analyse the consequent trade data.
Your system may look good with an expert overlayed on a single chart.
"But what about it’s existent human race trading performance?"
Typically, your system will dwell of entry and issue triggers, terms as well as an initial halt loss. These five parametric quantities basically define a model for a trading system. The problem with trying to endorse diagnostic test a trading system is that the system examiner built into Metastock is only extremely limited. As a result, this tin give a very contorted position of your possible trading system performance. TradeSim computer addresses all of these issues whilst exploring new land in technical analysis and uncovering new issues that have got not been addressed by current software technologies.
Remember, no matter what back tester you travel for, anything that sounds too good to be true volition attract the attention of a bargainer who is not satisfied with their ain trading system. This owed to the fact that they have got got not properly tested their system in the first topographic point and have not built up the necessary assurance needed to successfully merchandise it.
In the end, these negative subconscious mind ideas will only impede and destruct your ability to merchandise successfully. To better your assurance in your trading system you need to thoroughly and objectively back prove it - simple as that! Only then will you be confident adequate to perpetrate clip and money to it! By testing your system, you have got just set yourself into the top 1% of traders.