What is back testing
So why do you back test? Why spend all the time and effort dewing on something that has happened in the past? Is it going to be worth the time and effort?
First and foremost, it is for education purpose. I bet most of you traders out there have not touched back testing before. You might think moving average is a good strategy and have been using it religiously. Or head and shoulders can provide a good signal.
How’s your result so far? Perhaps you got some good results? Congratulations. Does it keep up into the future?
Or perhaps you were not as fortunate. Lost some cash?
Well I got news for you. Until you actually done back testing and experimented on those strategies, you have not even scratched the surface at all. That’s how I started. When I first started with trading, they were teaching me moving average, RSI and fibonacci retracement. I was so excited. I thought these indicators would give me a good edge and I am well on my way to be a master trader.
It was only years later that I learnt how to conduct back testing that I found out that these indicators do not meant much. Once I did the back test, I would really understand what it means when people say you need to have good position sizing. Why stop loss is important. I can graphically see the results on how every one of these conventional wisdom translate into reduced risks or increased return.
If you have not experimented with back testing, please start now! I promise you will learn so much more than you though you knew.