Almost every trader has knowledge about implementing a trading system but
most of them are unaware about the importance of backtesting. If you
are new to the trading, you must focus on this in the very beginning.
Although everyone know that the market is always changing and technologies
are advancing, but still it hold a convincing place in the trading practices.
What is Backtesting?
Basically, backtesting is testing a trading strategy in which the past data is
stimulated and for its effectiveness in the present state. This is mainly
done by plugging stocks into the modules, which is often known as the
universe. It plays a vital role in the development of an effective trading
system as well as in your technical stock trading technique.
How Backtesting Is Useful
Backtesting plays a significant role in capital markets as it helps in
determining the performance of the strategy. This testing always uses real
world data and analyze the vulnerabilities of a strategy by examining the
real conditions of the past. Undoubtedly, it helps a trader to learn from
past mistakes. The distinguishing feature of backtesting is that it
actually calculates how a strategy would have performed if it was used
in the past. Earlier, backtesting was only performed by professional money
managers and institutions, but now with the advent of electronic trading, it is
appropriate option for all traders. It also helps to determine whether the plans
that you are likely to adopt will be profitable or not. As it uses all the
historical data, thus you can analyze that whatever has happened in the past
will not replicate in the near future. It also provides you with all the
information that is needed to improve or accomplish your plan and help in
deciding how and where you can allocate your trading resources.
The most vital advantage of the process is that it accentuates the trader's
confidence in his trading system or trading strategy. You will yearn to modify
arbitrarily or continually. Undoubtedly, you will trade as if you had a
This testing can be used to backrest plethora of capital market strategies
such as stock screening strategies, trading strategies and day trading
Furthermore, it cannot be used for programmed trading strategies for buying
and selling large quantities as it results in feedback loophole. Feedback
loop is in the research phase, thus backtesting is not an appropriate option for
wrong in trading if you use backtesting