The Art Of Back Testing (Part 2)

Click here for Part 1 of The Art Of Back Testing

The Challenge

One trade that goes our way does not create a trend.

We need to back test for at least a year – more is even better since we need to create a test that survives good times and bearish times.

However a year is a good starting point.

You will want to write out every single detail of your plan which includes date, time of entry, direction, style of trading, ticker symbol, etc.

In the event you begin to see unfavorable results in your back testing then you need to make a change and get ready to begin anew.

Don’t destroy the “old” plan.

Keep the old plan handy so that in the event you begin again you don’t begin with the same parameters that did not work to start.

The key to back testing is to stay unbiased.

Don’t get into the habit of seeing what you want to see and simply focus on what is happening — period.

When to Go Live?

We want to make sure that we go live only when we have created a sampling that has the highest probability of being manifest.

Remember that the back test results may very well be the actual results that we will see.

When you do begin make sure that you begin with the smallest amount possible since the migration from going from a back test to a virtual may take some adjustments.

If something does not work out always ask why?

A More Accurate Alternative to Back Testing

Virtual testing is by far the best possible alternative to back testing.

In this case we are going forward in time as opposed to going back in time (which is what back testing) is all about.

All of the price charts, price quote, option quotes, open interest, etc. is as real as it gets.

The reason why I chose this method as opposed to back testing when I began trading was because I did not have the benefit of the future.

It cannot cloud my ability to see what was actual happening as opposed to back testing where I saw what I wanted to see.

Virtual testing results create a final result which is the truest possible outcome and that is the whole purpose of any trading method test!

Let’s review:

  • Free tools are best for back testing a style of trading where direction is the focus.
  • When price becomes the primary focus then we need to invest in a paid service so that we can get the most accurate results.
  • No back testing method can substitute virtual trading results.