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Archive for April, 2011

Hardly any trader will argue over the advisability of using trading systems. Not all trading experts however will suggest back testing. They may have just forgotten to mention it or they might not think it overly important to mention as a sole topic. Neophytes should realize though that along with systems, testing is a very vital trading component.

For beginners, the term doesn’t immediately give itself away. Even so, it is not a very complicated term to understand. What it involves is taking a trade system or plan into a process that will run it through a set of historical market data. This will let you see how a certain system will fare against a set of past market information.

Obviously, back tests are advantageous for several reasons. One main benefit to it is that traders are given a direct idea of whether a system is likely to give profitable results or not. The potential profitability of a trading system is a clear point of interest for traders mainly because there is no point in adopting a system that is likely to fail. Despite the fact that only historical data is involved, you can still effectively test a system. The situations that have unfolded in the past in the markets will probably have future parallel occurrences.

Good testing facilities don’t just secure one time profits. With a truly systematic test, traders get the benefit of evaluating the future effectiveness of their systems. In addition, tests give insights on what can make a system more accurate or complete. The simple factor of resource allocation for example can be determined through correct and detailed testing.

Technical back testing certainly has concrete advantages. The benefits however can cross over the less tangible elements. One benefit of testing for example is that it promotes the development of trader confidence. This is something every trader should have because without it, trading will become unsystematic. There will always be the inclination to jump from one system to another without hope of making consistent gains. That’s almost as if investments were made without a plan.

In other words, a scientific test has a solid and clear effect on a trader’s inner psychology. It is only after you’ve pushed your plan through back tests that you can say beyond a shadow of a doubt that you can use a system to make the appropriate decisions. You know your plan works so there’s no reason not to use it.

You can test your chosen system using the software included in your charting package. In some cases though, these testers just aren’t good enough. A typically ineffective tool takes a system through securities individually. This doesn’t just render slow results. It also leads to inaccurate conclusions simply because securities aren’t treated as part of a portfolio. An ideal procedure should be able to take into account the interrelatedness of a portfolio of securities.

There is no doubt that back testing is necessary especially if you decide to download the Metastock software. If you want profits to keep on coming, you need to consider tackling this first. Pick a testing tool that has a proven and effective track record.