Is System Backtesting Worth It?

Imagine if you have six losses in a row. But, you are okay with it.  What would that mean?  In short, it says you’re confident in your system because you KNOW that over time, you would still be profitable. In other words, you have a system and a methodology that works!

The painfully difficult fact to accept is that you can lose nine times out of ten and STILL be profitable.  If losses on the nine are kept small, the gain on the one big runner will cover all the losses and enable you to realize a hefty profit as well.

Naturally, our desire is to have a system and methodology that is both profitable AND has more winning trades than losers.  It feels better.  It’s less stressful, and quite frankly, just more fun!

But, no matter, if you’re a Wall Street shark, a newbie trader, or even an automated trading computer, the reality of trading, is this – if you have a system or methodology that gives you a win-loss ratio of 50 /50 – that’s a smokin’ system!

And even three wins out of ten is cool.

How so?

As long as you follow simple money management best practices and ensure that you take the maximum profit from each trade, you can even be profitable with a ratio of nine losing trades and just one winner, let alone a ratio that is 1/1 (or 50% losing trades and 50% winning trades).  In short, it’s about how much you win not how often you win.

Ok, you get that, you passed the “Trading 101” class a long time ago.

But … here’s the big question for you.  Are you currently following a trading methodology that produces profits?  Yes / No?  Don’t know?

It’s not easy to answer that question because even if you came out ahead after your last 100 trades, it doesn’t mean the same will happen again for the next 100 unless you are using a proven methodology – and you follow it religiously.

Most traders are in search mode for an efficient method.  Some are close, but still tweaking it.  They are creating their trading plan unique to their collection of indicators as applied to their chosen instruments.

But when do this creative and experimental period end? You do want to get to the point of using a proven practical methodology for your indicators, systems, and chosen instruments, right?

Of course – that’s the whole idea!  Trade on solid ground!  It’s never going to be about one trade or one month of trading.  It’s about every trade you ever took – and then looking at the bottom line and feeling awesome because it’s pitch black.

So, what’s your plan to find a profitable trading methodology for your system/collection of indicators on your chosen instruments?  The most common solution to prove/disprove your method is to backtest.

One option is to hire a professional system backtesting firm to test your methodology for you.  Yes, you can rely on the results, but it’s an expensive service. The cost of such a service ranges from $1000 to as much as $10,000, and it’s a total waste of money if your methodology turns out to be an overall loser.

The other option is to do it yourself.  This approach means putting in a lot of tedious and time-consuming time studying charts, recording your results in a spreadsheet, refining, and re-calculating.  It’s not easy.  Whenever I had to do this in the past, I always wondered if I was doing it right and that caused me to doubt my system backtesting results.  At best, it gives you a rough method to follow, but of course, that means it’s always subject to review and revision, and, therefore, you remain in experimental doubt mode, without ever establishing a reliable methodology!

The easiest and most cost-effective way to test is to use a system backtesting program. You just plug in your parameters, and the software spits out the results. Want to try quickly try a different scenario? No problem. Just adjust your input parameters until you get results that align with your trading goals! This process takes just minutes and allows you to move ahead confidently with your trading system/methodology.

Using system backtesting software ensures thorough and accurate backtesting results that you can use immediately!