Frequently Asked Questions about Backtesting

Welcome back to our series on backtesting. And in this video, I'm going to talk about the frequently asked questions for backtesting. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos, because I've got new trading content coming out all the time and I don't want you to miss a thing. The number one frequently asked question is, what is backtesting in trading? And quite simply, backtesting is where you take your trading system rules, you put them into software designed for the purpose, and you apply those rules to historical data to generate all of the buy and sell signals that those rules would have generated in the past. Those buy and sell signals are turned into a portfolio, and the back tester gives you the performance statistics of that portfolio. So it will give you the compound annual return, the drawdown, the percentage of winners, percentage of losers, size of wins, size of losses, mar ratio, and various other statistics. So backtesting is a way of, of quickly analyzing the performance of your trading rules on past data to give you an idea of whether those trading rules were profitable or not. The next frequently asked question I want to talk about is, is backtesting useful? I often get asked the question of is backtesting useful? And should I really be bothered doing this? And my short answer is, yes, absolutely. It is one of the most powerful tools in your trading toolbox if you use it correctly. And the number one thing to think about is, would you rather be trading blind or would you rather know whether your strategy was profitable in the past or not? Obviously, we can't predict the future. We can't apply our trading rules to the future. We can only work with past data. But if your trading rules did not make money on past data, they're not going to miraculously make money in the future. And if your trading rules did make money in the past, then there's a chance that they might make money in the future in the future. And if you backtest correctly, as I've discussed in this backtesting video series, then there's a very good chance that your system will be profitable in the future. So is backtesting useful? Absolutely. It's one of the most important tools you can have. The next frequently asked question is, is backtesting a waste of time? And no, backtesting is absolutely not a waste of time. What is a waste of time is blindly following a set of rules that you have not tested and you don't really know if they're profitable over the long term. What really is a waste of time is putting your rules into a backtesting engine, running a massive brute force optimization of 365,000 combinations of parameters, choosing the one best parameter from the last 10 years and applying it to future data, hoping to get rich. That is worthless and it will lose you money. But correct backtesting, as I've discussed elsewhere in this video series, is a really powerful tool to make sure that your system is stable. It's robust across a broad range of parameter values, it has performed and kept you afloat over a wide range of market conditions, and the edge is intact, it's not eroded. Backtesting is a very, very useful tool. Does backtesting work? Is the next Q and A the next frequently asked question? And yes, if backtesting, if you backtest correctly is a very powerful tool and it gives you a lot of information about your trading strategy. If you backtest incorrectly, like anything, garbage in, garbage out. Got to have the right process. And that process is what I teach in the Trader Success System. So if you want to learn how to back test and run your systematic trading portfolio correctly, then consider joining the Trader Success System and learn how to back test and run a systematic portfolio in a way that gives you the maximum chance of run real trading profits.