So you’ve decided to give stock trading a go. You’ve read a
few books on technical analysis, and learnt the basics on candlestick patterns,
moving averages, oscillators, and other technical indicators. You’ve either
found a stock trading system, or developed your own. Whether it’s a simple
moving average crossover, or a complex system involving Fibonacci, probability,
trend lines, and oscillators, you will need to test your system. How will you
know if your trading system can be profitable in the future if it isn’t
profitable for at least some period in the past.
We all know the past doesn’t necessarily represent the
future. All books, and websites online have that disclaimer. And it is true;
Just because a trading system performs well in the past doesn’t mean it will
remain profitable in the future. However, you may also want to look at it from
this point of view. If a trading system continually loses money every year for
the past 10 years, what’s the likelihood that it will magically become
profitable over the next few months? If the graph showing capital over time
looks like a slippery slide, it is highly unlikely that it will look like a
mountain once you start trading with real capital.
If the current market is ranging sideways, then you would be
more comfortable going live with your real money if your back tests showed it
was profitable at least part of the time when the market previously ranging
sideways. However, don’t expect profits in a ranging market if the system’s a
trend following system. Not all systems are profitable 100% of the time. Some
are only profitable during trending periods. Others are only profitable during
ranging markets. There is no system that will be profitable in all different market
conditions. You will need to use your common sense when performing back testing.
There are many software programs available for download
online that will test your trading systems for you. Simply code in your buy and
sell conditions, and the program will run through all the data it has, and spit
out a report with the details of each trade placed, and the profit or loss
outcome. I personally recommend Amibroker, as this is what I used after some
research online. I am not affiliated with the software company in any way. I
just think that it is the most value for money software you can get online. It
is decently priced, and has all the critical functions you need. I don’t
believe you should spend 6 thousand dollars on a piece of software, and then
another 6 to attend the training course. Amibroker is a few hundred dollars,
and will do the trick nicely. There is a huge support network online through
forums that are happy to help you with any trouble you have with the software.
You don’t have to choose Amibroker. Any other charting
software will do. Once you’ve got that, its simply a matter of writing up your
buy and sell conditions, importing Historical Stock Data into the software, and back testing your trading systems.
Good Luck with all your future trades.