Backtesting is using computer models to determine whether a given trading strategy has merit. You run a given set of parameters against historical market data. The computer backtesting model will give you an automatic result as to how well the strategy would have worked in the past.
So what about backtesting a trading strategy? Does it have any worth? How do you backtest a strategy?
(Video Included. If you're seeing this entry elsewhere and cannot see the Video? Click here to view the entry ...)
In addition to what I mention in the above vlog, you have to remember that when you backtest? You may be running the data through a historic period of the market, where that strategy would have worked well.
But as I often tell folks? The 'environment' that you can find yourself in often changes. For example, in 2004, we were in an investing environment. Right now, we're in a trading environment. That may last some time. We could then enter an 'investing' environment once again.
If you backtest data through one 'type' of environment, it may provide fantastic results. So what if you backtested your strategy during a time period that was an 'investing environment', but try to use it on the current 'trading environment'. Do you see how the results could become skewed? You'd be using something that worked well in an investing environment from years ago, within a current trading environment.
Now ... if you haven't seen them yet? Well, for your comedic entertainment ... I present "Flight of the Conchords" ...
For married couples ...
If you are married? That's just funny. I don't care who ya are, that's just funny :)
The last skit from the David Bowie Series ...
I guess you have to have a really sick sense of humor to love this stuff. Personally? I'm laughing every time I see it.
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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.