O backtesting

BACKTESTING

Trading is not just about watching the markets, waiting for opportunities, and then entering trades. A key aspect of success in trading is also continuous education and improving one's skills. When we are not trading, we have an ideal opportunity to spend time on these important activities that will help us become better traders and increase our chances for long-term success.

 

The importance of education and reading books about trading:

 

1.     Expand ideas and skills:

Educating oneself through reading books about trading gives us a deeper understanding of the markets, various trading strategies, trading psychology, and technical tools.

Books, articles, and professional publications can offer us a new perspective on various aspects of trading that we might not otherwise realise.

2.     Gain knowledge without risk: 

While actively trading on the markets, we always risk our money. However, when we read professional literature or take online courses, we can educate ourselves without having to take that risk.

In this way, we can experiment with new strategies, gain theoretical knowledge, and analyze successful approaches without facing financial losses.

3.     Psicologia comercial:

Books and courses focused on trading psychology help us better understand how our emotions influence our decision-making.

Many traders overlook the psychological side of trading, which makes them less effective.

Reading about psychology helps us recognise how fear, greed, or euphoria affect us and how to deal with these emotions.

 

The importance of backtesting in trading:

O que é backtesting? 

Backtesting is the process of testing a trading strategy on historical data. Essentially, we take a specific trading strategy and apply it to past market data to see how this strategy would have performed in the past. This process allows us to verify whether the given strategy would have been profitable and whether it is suitable for live trading.

 

How to correctly perform backtesting:

1.     Define the rules of the strategy: 

Before we start backtesting, we must have clearly defined rules for the trading strategy. These rules should include when we enter the market, what indicators we use, our stop-loss and take-profit settings, and what other factors influence our decisions, e.g., RRR (risk-to-reward ratio).

2.     Test your strategy on historical data:

We apply our trading rules to historical market data and record the results. It is important to test the strategy in different market conditions (bull market, bear market, consolidation).

3.     Analyse your results:

After completing the backtesting, we must evaluate the performance of the strategy.  We monitor indicators like profitability, the number of winning and losing trades, the risk-to-reward ratio, and other statistics that tell us whether the strategy is suitable.