Most traders just use strategies that they are taught or find in books or on social media. The problem with this, is that they are not tested and after a couple of losses the trader is doubting the strategy and then moves onto the next. If you are really wanting to take your trading seriously then testing is top of the list.
Back testing trading strategies is an essential step in evaluating their potential effectiveness before deploying them in real-world trading. The benefits of back testing include:
- Performance evaluation: By simulating trades and measuring the right metrics such as returns, risk, and drawdowns, you can gain insights of how the strategy would have performed in the past.
- Strategy Optimisation: Back testing provides a platform to refine and optimise strategies. By modifying parameters, such as entry and exit criteria, or other factors you can access the impact of these changes on historical performance.
- Risk Management: Back testing helps in evaluating the risk associated with a trading strategy. By analysing historical drawdowns, volatility, and risk-adjusted returns, you can gain a deeper understanding of the strategy’s risk profile. This information can be used to adjust position sizing, set stop-loss levels, or incorporate risk management techniques.
- Market Understanding: Back testing allows you to explore different market conditions and scenarios. By testing strategies across different time periods, market cycles, and economic environments, you can gain insights into how the strategy performs in various situations. This helps to assess the strategy’s robustness and adaptability.
- Confidence Building: Successful back testing can build confidence in a trading strategy. If a strategy consistently performs well across multiple historical periods and shows resilience to market changes, it can instil trust in its potential for future trading.
- Error Detection and Improvement: Back testing can help identify flaws and errors in a trading strategy. By analysing trades that did not perform as expected or led to significant losses, you can gain insights into weaknesses or potential pitfalls. This information can be used to refine and improve the strategy, reducing the likelihood of similar errors in live trading.
Overall, back testing allows traders to make informed decisions by evaluating and fine-tuning trading strategies based on historical data. It helps to manage risk, optimize performance, and build confidence in the strategy’s ability to navigate real-world market conditions.
Back testing manually can be a laborious process hence why so few traders bother. Much of the software/tools out there are quite complex. For example TradingView has a useful tool if you can work your way around their Pinescript code.
Personally whilst I am reasonably tech savvy, I draw the line in writing code or spending hours trying to work out how to. Fortunately there is now an alternative which instead is based on simply listing the logic to your set up.
Naked Markets is the most straight forward piece of software I have come across. It is based on description of the rules so this is relatively easy if you fully know them. I recorded a webinar I held demonstrating the software, a summary of which you can watch below.
Click the button to download the software for a free trial and save $20 on the list price.
To learn how to use the Naked Markets software click on the button below