A trading system might consist of a few indicators and a number of rules that tell when to enter the trade and when to exit the trade. Trading system is considered to be proven and tested if there is some date that supports its performance under live market trading conditions. However, it might not be possible to test a trading system quickly under live trading conditions. To overcome such problems, backtesting has been developed. Backtesting is done with the use of a software.
How to do backtesting? Backtesting uses historical data to test the performance of the trading system under the past market conditions. Using a backtesting software makes it very simple and easy.
Now, back testing is done with historical data. What this means is that although your trading system might perform very well with back testing, it may not work in the present market. Market conditions keep on changing and what worked in the past may not work in the present. In the same way, what didn't work in the past may start working now.
So when you look at back testing results, you should look at them with scepticism. But it doesn't mean that backtesting is entirely useless! What we can say is that no two trades are exactly alike.
Back testing can give you a feel how a particular market behaves under certain conditions. Back testing can also spot you certain general characteristics of the market like the seasonal trends and market tendencies.
For example, some markets especially the commodities market is highly seasonal and cyclical in nature. We can take the example of agricultural commodities like wheat, grains,corn, cotton, coffee and stuff like that. In case of the stock market, there is much talk of the January Effect. Well, it is there no doubt about it. Some years, it is highly pronounced and others it is not that pronounced. Similarly stock prices tend to rise at the end of each month and the first few days of the new months. The reason for this is that many institutional investors tend to put the new funds to work at the end of the month and the beginning of the new month! Now in other markets, you might not find any seasonal trends. For example, there is very little seasonality in curreny market or the bond market.
Backtesting can help you figure out how long a trend might last in a particular market. For example, US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times.
There is no substitute for live trading results! To tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions. - 32177
How to do backtesting? Backtesting uses historical data to test the performance of the trading system under the past market conditions. Using a backtesting software makes it very simple and easy.
Now, back testing is done with historical data. What this means is that although your trading system might perform very well with back testing, it may not work in the present market. Market conditions keep on changing and what worked in the past may not work in the present. In the same way, what didn't work in the past may start working now.
So when you look at back testing results, you should look at them with scepticism. But it doesn't mean that backtesting is entirely useless! What we can say is that no two trades are exactly alike.
Back testing can give you a feel how a particular market behaves under certain conditions. Back testing can also spot you certain general characteristics of the market like the seasonal trends and market tendencies.
For example, some markets especially the commodities market is highly seasonal and cyclical in nature. We can take the example of agricultural commodities like wheat, grains,corn, cotton, coffee and stuff like that. In case of the stock market, there is much talk of the January Effect. Well, it is there no doubt about it. Some years, it is highly pronounced and others it is not that pronounced. Similarly stock prices tend to rise at the end of each month and the first few days of the new months. The reason for this is that many institutional investors tend to put the new funds to work at the end of the month and the beginning of the new month! Now in other markets, you might not find any seasonal trends. For example, there is very little seasonality in curreny market or the bond market.
Backtesting can help you figure out how long a trend might last in a particular market. For example, US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times.
There is no substitute for live trading results! To tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions. - 32177
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. Download these Forex Scalping Cheatsheets FREE! Read this shocking FREE 40 page PDF FRWC Brutal Truth Report that exposes everything about trading robots!
