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Backtesting

Backtesting Backtesting

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 an 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 your plan arbitrarily or continually. Undoubtedly, you will trade as if you had a comprehensive plan.

This testing can be used to backrest plethora of capital market strategies such as stock screening strategies, trading strategies and day trading strategies. 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

August 2013


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