What is back testing? Back testing
What is back testing? Back testing
Back testing can be an important step in optimizing how you interact with financial markets and helps you understand if your trading ideas and strategies make sense and if they can potentially lead to profitability. Will they be for you or not? In this article we will tell you how back testing a trading strategy is done and what you should consider in back testing; In addition, we will introduce you to back testing methods. Please follow Zand trader.
Introduction of transactional back testing
Back testing is a tool that you (as a trader or investor) can test your new trading strategies while exploring financial markets to ensure they work properly. Back testing can give you valuable feedback based on market data and tell you if your first idea was valid!
In fact, if you do back testing before implementing any of your trading strategies, you will obviously invest your capital at a lower risk.
What is back testing?
The back testing process is based on the historical data of the financial market and in simple terms, back testing, examines the accuracy and durability of a trading strategy. In other words, it uses past market data to examine how a strategy works, and if the back test shows good results, traders or investors can decide whether to enter the real market with this strategy. Enter or not!
What is the meaning of a good result in back testing?
The purpose of back testing a strategy is to analyze the risks and potential profitability of that particular strategy, and the investment strategy can be optimized based on statistical feedback to maximize potential results. With the good results of a back test, a trader can be assured of how effective that strategy can be, at least when implemented in a real trading environment.
If the results of back testing indicate poor performance, or in other words, less than desirable for that strategy, that trading idea or strategy should either be discarded or revised. However, it is also important to consider the market conditions in which the back testing took place; this is because the same back test can provide conflicting results when market conditions change. These contradictory results are sometimes due to disregard for market sentiment, which causes market cycles to change. So pay attention to these important points.
How does Back testing work?
The underlying hypothesis behind the test is whether what has worked in the past and worked well may work in the future. However, achieving confidence in this area can also be somewhat difficult, because what may be profitable in one market environment will fail completely in another.
But what plays a crucial role in the accuracy and reliability of back test results is the data set that is used for back testing.
Back testing with misleading data sets can produce inaccurate results. That’s why it’s so important to find good data samples for back testing, which can more accurately reflect the current market environment. This can also be a little difficult, because the financial market is not in a constant state and is constantly changing.
Important points to consider before backing up
Before you decide to back up a strategy, you need to know exactly what you want to know and this can be very useful for you. In other words, you need to know what makes this strategy work? Or vice versa, what can make your assumptions last? This way, if you already know this, you will make a more realistic decision about the results.
In addition, it is important to know that back testing should include transaction and withdrawal costs and any other costs that the strategy may incur. It is also worth noting that back test software can also be very expensive, and you may have to pay a lot of money to access high quality market data.
Of course, back testing can be done manually or through existing software, which due to the increased probability of error in the manual method, most traders prefer to do this using back testing software. Give.
And dear friends, keep in mind that a good back test that shows good results, similar to technical analysis and charting, has no guarantee of definitive performance, even if it produces excellent results based on historical data. This is very important, so be careful when trading.
Keep these in mind when backing up
When traders test their trading strategies or do so-called back testing, there are several factors to consider. In this part of the article, we will discuss the most important ones.
-Note that your back test, on one instrument, gives you only the strategy for that instrument. For example, the back test results on the USD / CAD chart will not be useful for implementation on the
EUR / USD chart.
-You have to pay attention to the details when taking back tests; like the hours you can trade on the chart in real time. For example, if you are only able to trade from 2pm to 8pm, include this in the back test and do not include entry points before 2pm and after 8pm in the back test calculations.
-Simulate the whole trading situation in the back test. Such as drawing stress ranges and transferring them from time structure to trading time or if you want to use indicators.
-It is better to calculate the compound profit in the back test.
-You can do two risk management models in your back test.
-Make sure your back test is not less than one year apart.
-You have already prepared a back test for all the instant maps you want to apply to the chart.
-Prepare back tests for medium-term trades with a separate concept and for scalp with a separate concept.
The final word
Back testing is one of the most important aspects of developing a trading system. Properly created and interpreted, it can help traders optimize and improve their strategies; In addition, if they find a technical defect or idea, they can apply, correct and test it in their strategy before applying it in real markets.