Back testing software is extremely important for the analyzing of trade systems. This is a process of testing out a particular trading strategy through the utilization of past date, instead of using real money and taking risks in real time. This is a way in which people can tell the way in which a strategy would work if it had been done in the past. This will give a trader the information he or she needs to determine whether or not it will be a feasible trading strategy.
Logically, we know that the results from this type of testing will not be able to predict future returns with pinpoint accuracy; however, it can provide an indicator as to whether you should even pursue a trading system or not. What’s more, if you decide to go ahead and trade the system, it will give you guides on what to expect.
There are a number of things that you will have to ask yourself, one of which is whether or not you’ll have the ability to examine system progression as time goes by. There are two basic ways of accomplishing this. The first way involves doing it manually, the second involves doing it with software. Personally I would do it with software, as it provides much more accurate results over a shorter period of time.
Back testing software can be quite beneficial to you. It will let you test your system, and overall it’s going to save you a lot more money, covering your initial investment in the back testing process. If you want your trading system to be a success, you will consider investing in this.
Mechanical Back Testing
Please understand, as long as your mechanical trading system exclusively works with price data (open, high, low, close, volume), you will be able to use back testing software.
Here is an example of a rule that you might want to use with your mechanical system:
Purchase the security when the ten day moving average that is grouped with the closing price goes pas the thirty day average.
By utilizing this particular rule using historical date, you will find that the back testing is pretty easy. Signal rules on the other hand are a bit harder:
Purchase a security when the 10-day moving average of the closing price crosses above the 30-day moving average of closing price and the PE ratio was 75% or lower than its value three months before.
A lot of the time you will fin that this rule gives data that is not present in the database. If you want to carry out this test accurately, make sure that you have the historical data of the security in addition to it’s PE ration, or price earnings ration.
Unfortunately most mechanical trading system based on fundamental data is beyond the scope of retail investors due to the lack of historical data available to conduct a complete back test.
Back testing software
Fortunately, these days, many charting packages have back testing software built in. If you followed the process for selecting a charting package in the previous chapter, you should have either found one with back testing capabilities included or found one that is compatible with another off-the-shelf package.
If you’re looking for a decent piece of software, you should definitely have a look at TradeSim. It can help you back test and check out a trading system with relative ease. Regardless of whether or not you’re dealing with a single security, or an entire portfolio.
Back testing is the only way to get over your personal doubts in a system. When you’ve confirmed that your trade system is reliable, you will be comfortable with using it in practical trades.
Just like your trading system however, make sure that you have a reliable back testing software. Also make sure that you know the ins and outs of it, as you won’t be able to take full advantage of it unless you know it will.
Tags: back testing, trading system
