Back testing, why is it important?

I am sure as a trader you have heard of at least ten different trading strategies. It seems like every trading guru seems to hold the secrete trading strategy that is making them big bucks in the market. It may almost seem like there is this secrete trading strategy out there you need to grasp so that you start seeing trading success. However it doesnt work like that. There are some key things you first need to learn and understand about trading strategies before you see trading success.

You see, every trading strategy has a success rate, which mean that out of a 100 trades you will take when following the rules of a trading strategy there is a guaranteed number of successful trades and losing trades that will occur. No trading strategy has 100% success rate. Also trading conditions change all the time, so one strategy with a say a 70% success rate can jump to 80% or slump to 60% depending on the trading environment at the time. You also need to understand the risk appetite each strategy requires. Your risk management need to work hand in hand with expected success rate of your strategy. There is no point in risking 50 percent of your trading capital on a trading strategy will with a 80% success rate because with just two losing trades you will be out of the game. This is why you should then back test your strategy so that you familiarize yourself with strategy before trading real money.

What is back testing？

Back testing refers to the process of testing a trading strategy before you invest real funds into it. You are essentially practicing the trading strategy and getting to know it personally. There are different ways to back test. The most common method is getting a demo trading account. With a demo account you are able to trade paper money or fake money in the current trading market. To do this you need to find a suitable broker who will allow you to open a demo account and trade. To find a good broker I suggest you look through WikiFx. The app will help you find the best regulated and verified broker who adhere to strict rules of conduct and guarantee good customer services. You can also find brokers with the smallest spreads so you can already get to know how the broker functions and build an expectation of the cost you will incur when trading with that broker.

When you do get this demo account you will get to understand the strategy in and out. You will calibrate your risk management accordingly and build confidence in the trading strategy. Using this demo account you can also go back in time and find instances where your trading strategy could have worked and not worked. It is imperative that you do this exercise because you will only pull yourself towards disaster if you skip this step. You will find yourself jumping from one strategy to another, looking for the golden trading strategy when all along you could have stuck to one strategy and see profits. You just have to humble yourself and get in the hours of practice each strategy requires