Essential Back Testing Software Knowledge

February 6th, 2010

Create a Profitable Trading System

Back testing software is extremely important for the analyzing of trade systems. This is a process of testing out a particular trading strategy through the utilization of past date, instead of using real money and taking risks in real time. This is a way in which people can tell the way in which a strategy would work if it had been done in the past. This will give a trader the information he or she needs to determine whether or not it will be a feasible trading strategy.

One thing that we know for sure is that this won’t really provide the most accurate results. What it will tell you however, is whether or not you even want to give that trading strategy a second thought. It will even tell you what you can expect if you choose to go ahead and try the strategy.

One thing to ask yourself is whether or not you will be able to examine the progress of a system over a period of time. You can do this, either by yourself, or with the use of a piece of software. Frankly, it is best to do this with a piece of software, as doing it manually is very time consuming, and it is difficult to tell whether or not your results are actually accurate.

Do not underestimate or undersell the benefits of back testing software. Not only will it give you the time and opportunity to test out your system, it will also save you quite a bit of money in the long run! This is definitely a great thing to invest in if you want to create a useful and successful trading system.

Mechanical Back Testing

Keep in mind that if your mechanical trading system works exclusively with price data, back testing software will be a viable option.

Let’s talk about this for a moment. Perhaps you devise a mechanical system that uses this entry rule:

Purchase the security when the ten day moving average that is grouped with the closing price goes pas the thirty day average.

By utilizing this particular rule using historical date, you will find that the back testing is pretty easy. Signal rules on the other hand are a bit harder:

Buy a security as the ten day moving average of the closing price goes over the thirty day moving average, as the PE ratio is 75% or below it’s actual value in the previous three months.

Many times this rule will provide information which is not included in the database of price information. In order to do this test properly, you would need historical data of a particular security and it’s price to earnings ratio, which is also known as the PE ratio.

The biggest issue is that many investors cannot use the mechanical trading systems because of the lack of historical data. This data is needed to complete the back test.

Back testing software

Fortunately, these days, many charting packages have back testing software built in. If you followed the process for selecting a charting package in the previous chapter, you should have either found one with back testing capabilities included or found one that is compatible with another off-the-shelf package.

One of the more realistic programs is TradeSim, which has the ability to back test and evaluate a trading system quickly and accurately. It doesn’t matter whether it is one security, or many securities.

I believe back testing is the only way to remove self-doubt. Once you have established that you have a reliable and robust trading system only then will you be confident in trading it.

Your trading system however will not thrive unless you choose back testing software that is reliable and rock solid. In addition to it’s stability, make sure that you are able to learn it and take full advantage of it’s features.

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