How to make backtesting more effective
The efficacy of any trading platform depends on backtesting, a process where historical data is used to test the strategy before actual capital is used. Thus, a trader actually imitates an actual trade and analyses the results to see if the strategy will yield profits. But there are some things that need to be considered to make this stage more efficient and productive.
Points to consider:
Manual trading or automated trading systems like the QProfit System backtesting is an integral part of trading. It is not fun to do this testing therefore when you are at it make the most of it by following the tips stated below.
- Choose a long-time frame: You need to take into account the time frame in which a strategy was tested and also consider the market trends during the testing phase. Your system might not work if it is not exposed to different market conditions for backtesting. That is why choose a time frame that is spread over several years.
- Keep exposure low: As a general rule, it is seen that the higher the exposure the greater the profit and conversely the greater the loss. Adopt a conservative approach where your exposure is no more than 70%; this method will minimize your risk and allow you to get in and out easily out of a stock.
- Avoid over optimization: Invariably during backtesting, the developed tunes the performance results to a large extent to past which obviously will not fit into a volatile market where the parameters keep changing constantly. To avoid this scenario, make rules that apply to all stocks or at least to a select few.
- Mimic the broker: If you want your testing to be accurate you must tune all the settings to behave like the broker who will be used in the live stage.
- Don’t forget the bars: The main reason for this testing system is to ensure that you get good returns once your system goes online. A key way to improve returns is to reduce commission costs by increasing the average number of bars. Commission costs can also be reduced by increasing the average gains and the win-to-loss ratio.
Systems like the profit system, Click here to know more about it, are successful because of successful backtesting. Any system with a well develop backtesting option in place will not only improve the trading strategies and optimize them but will also highlight any technical flaws in the system before you go live. It is important to have all your bases covered before entering the real world.