Why should you backtest your strategy ?

“I learn a new trading strategy and it seems to work for a while. But shortly… I started facing multiple losing trades and as result I stopped working on it with conclusion that my trading strategy isn’t working anymore.”

“So, again I start looking for another trading strategy and the cycle goes on and on.”

This happened to me every time in my initial days. And this will continue until you give up on trading or, you find a conviction to stick to your trading strategy.

 

Now you’re probably wondering:

How do I find conviction in my trading strategy?

 

Well, you need to learn skills how to do proper back testing of your trading setup. It doesn’t require that a guy should have good coding knowledge as myself I don’t have coding background.

 

So, what is Backtesting?

 

Backtesting refers to testing your trading strategy on past data and see how it performs over time.

Why do I want to backtest my trading strategy?

 
  • Backtesting your trading strategy tells you whether you have an advantage in market without risking any real money

  • If your trading strategy works, it gives conviction to stick to it — while other traders doubt themselves and their strategy (especially during a draw-down)

 

But before you can backtest any trading strategy, you must have a trading plan (a set of rules that guides your trading decisions).

Because you don’t want to look at a chart and wonder:

 
  • Should I enter a trade now?

  • Should I wait for 5 minutes?

  • Where do I set my stop loss?

  • How do I exit my winning trades?

 

This ruins your backtest and you’ll have inaccurate results.

 

So, if you don’t want this to happen to you, then your trading plan must answer these 7 questions:

 

1. What are the conditions of your trading setup?

2. How much do you risk per trade?

3. Which time frame are you trading?

4. Which markets are you trading?

5. What is your entry trigger?

6. Where is your stop loss?

7. How will you trail your winners?

Once you’ve developed your trading plan, then you’re ready to backtest your trading strategy.

 

And here’s how…

You can backtest in trading view

 

This is an approach to backtest your trading strategy if you have no programming skills. You can do it manually in trading view

There is a feature called “BAR REPLAY”, which will hide the future data. Now go through the chart bar by bar, and objectively trade the markets

 

Assume you are performing in live markets

How I backtest:

 

1. I first select the market I want to backtest and scroll back to the earliest of time

2. Plot the necessary chart (nifty, bank nifty or any equities) and if required any indicators on your chart

3. Then I ask myself if there’s any setup on your chart

4. If there is, mark your entry, stop loss, profit target, and record the results of the trade in excel.

Final thoughts:

 

I know some of you will be saying to yourself that this will take too much time to do and that while you are backtesting you could be making money by actually trading. But let me assure you that if you take the time to do this exercise, not only will you fine tune your trading plan, you will fine tune your skill and abilities to trade. It will also give you much more confidence in your trading plan and confidence to stick to it if things turn sour.

But the real benefit is that your journey to becoming a successful trader will be much quicker and more profitable. If you decide not to back-test your trading plan, your journey will be much slower and harder, and you will be less profitable. So the question you have to ask yourself, is which option would you prefer?