How To Back Test Your Trading System Like A Pro

Sep 30, 2023

You can forward test your trading system.

But if you don't back test, you'll never know if it's profitable.

This edition will discuss how to back test your trading system like a pro.

Back testing is the process of testing your trading system on historical data to see how it would have performed in the past.

Back testing is essential for any systemized trader, as it allows you to:

But how do you back test your trading system like a pro?

Here are some best practices to follow:

Use quality data: The quality of your data will affect the accuracy of your back test results. You need to use reliable data sources that provide enough data points, frequency, and history for your trading system.
Use realistic assumptions: The assumptions you make in your back test will affect the realism of your results. Your trading rules should be aligned with your market observations. You must account for transaction costs, slippage, commissions, spreads, dividends, splits, etc.
Use robust statistics: The statistics you use in your back test will affect the validity of your results. You need to use metrics that measure return and risk, such as expectancy, drawdown, win rate, profit factor, etc.
Go long-term: The duration you use in your back test will affect the results' generality. You must test your trading system on long-term historical data to account for different market cycles and volatility scenarios.

Follow these best practices and apply them to your own trading system.

I hope you find this helpful and practical.

If you have any questions or feedback, please leave a comment or join our Facebook group, where we discuss everything related to systemized trading.

Until next week,

Pratik

P.S. What is your one big challenge in your options trading? How can I help you? Let me know by filling out this form.

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