Why Backtesting Is Important

Backtesting your strategy is essential before attempting any form of live trading.

I personally do not think that a simple backtest of 50-100 trades will give an accurate portrayal of your actual live trading results, simply because i) the sample size is too small, and ii) market conditions change all the time.

However, there are still some benefits to backtesting, in my opinion:

  1. It gives you an idea of whether your strategy is a profitable one or not. Let’s put it this way: If your backtest yields unprofitable results, you can be sure it will not be profitable in live trading. If your backtest yields profitable results, then there is a chance it may still be profitable in live trading after factoring in spreads and provided there is a solid risk management plan.
  2. It gives you some kind of assurance and emotional support when you start hitting a bad patch in live trading. No doubt, a backtest sample data of 50-100 trades (or even 200 trades) is hardly conclusive, but it at least serves as a rough chunk of data to rely on, and you would know your approximate projected win-rate, profit factor, and number of consecutive wins and losses. So at least when you hit a string of losses, you can still find the motivation to stick with the strategy and not abandon ship immediately.

Besides, let’s face it – there can never be a thing as enough backtesting.

What is enough backtesting? 100 trades? 1,000 trades? 10,000 trades? Or all trades since the beginning of time?

And even if you manage to backtest every single trade since the beginning of time, some traders would still tell you that that doesn’t guarantee anything because markets change all the time.

So who really knows right? You just have to go with whatever backtest data you’re comfortable with.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s