Why It Is Absolutely IMPERATIVE For You To Backtest Your Trading Strategy!

by Mark Williams on December 21, 2008

It took a while, but I had finally done it.

I had the results from backtest of the trading system that I had been using FOR YEARS there in the palm of my hand.

Did I truly find the holy grail system, I had thought, or was my system just doomed to failure, but I just did not know it yet?

Like a kid at Christmas, I watched the system compile all of the data (very quickly I might add), and it finally revealed what I had been waiting for…

A little background first.

The system that I had been using had been a derivative of another system that I learned from a workshop many years ago, you know, one of those $1000-4000 ones. I had been using it for a while, but somewhat moderate success (I found another system by accident that I had been using more).

I had always wondered by that system I had used was so wishy-washy with the results I that I was getting. You see, when every was good, it was REAL good. But when everything went bad, it went REAL bad.

And now I know why…

Anyway, back to the results.

With the system that I had been using for stock trading, continued usage would have resulted in a 87.6% drawdown (over historical data).

87%

87%!!!

Using the system on the S&P 500 stocks only resulted in 6 out of the 500 stocks being profitable over time, and a Risk to Reward ratio of 11:1

And this is over a time period of 20 years (1988-2008).

I will not reveal the company that I learned from, nor will I tell you the rest of the results (using this systwm with commodities and forex would have resulted in heart palpitations, nausea, and thoughts of suicide).

So, what’s my point?

You need to learn how to test your trading strategy.

Period, end of story, just do it.

Too lazy? Well, if you do decide to take one of those super wham-a-dine trading systems courses, make sure that they provide you with backtested results of said system.

If they do not, then get the hell out of there.

Now, I am not knocking taking seminars on trading. This post is actually far from that.

If anything, taking a training seminar on trading is one of the FASTEST ways to learn how to trade.

But, if said course says “Use this system, because it has given us X return, over such and such a time,” then make them prove it…unless you like losing money.

There will be more to come here about how to test, what to test for, and how to understand all the information that you have received from said test.

I will also show you how to avoid the common traps associated with backtesting, and tricks that people use tswindle a person into thinking that the system that they invented is THE holy grail.

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