Significance of Back Testing in Trading

Almost every trader has knowledge about implementing trading system but most of them are unaware about the importance of the back trading. If you are new to the trading, you must focus on this in the very beginning. Although everyone know that the market is always changing and technologies are advancing, but still it hold a convincing place in the trading practices.

What is back testing?

Basically, Back testing is testing a strategy in which the past data is stimulated and for its effectiveness in the present state. This is mainly done by plugging stocks into the modules, which is often known as the universe. It plays a vital role in the development of an effective trading system as well as in your technical stock trading technique.


How back testing is useful?

Back testing plays a significant role in capital markets as it helps in determining the performance of the strategy. This testing always uses real world date and analyze the vulnerabilities of a strategy by examining the real conditions of the past. Undoubtedly, it helps a designer to learn from the past mistakes. The distinguishing feature of Back testing is that it actually calculates that how a strategy would have performed if it was used in the past. Earlier, Back testing was only performed by professional money managers and institutions, but now with the advent of e trading, it is an appropriate option for traders. It also helps to determine whether the plans that you are likely to adopt will be profitable or not. As it uses all the historical data, thus you can analyze that whatever has happened in the past will not replicate in the near future. It also provides you with all the information that is needed to improve or accomplish your plan and help in deciding how and where you can allocate your resources.

The most vital advantage of the process is that it accentuates the trader's confidence in his system. You will yearn to modify your plan arbitrarily or continually. Undoubtedly, you will trade as if you had a comprehensive plan.

This testing can be used to backrest plethora of capital market strategies such as stock screening strategies, trading strategies and trade strategies. Furthermore, it cannot be used for programmed trading strategies for buying and selling large quantities as it results in feedback loophole. Feedback loop is in the research phase, thus back testing is not an apt option for such strategies. To conclude, it is quite evident that you can never go wrong in trading if you use back testing.

Addison Ailee is a great person with immense knowledge of market and Back testing. His work can give some fantastic information about Trading Strategy.

View the original article here