The purpose of backtesting is to take a look at the performance of a stock over a period of time. Backtesting stocks is a way for traders to see if a certain method of trading on a particular stock is profitable. The best tips for backtesting stocks include opening a charting program and running the test. After looking at the backtesting results on a spreadsheet, change the parameters if a trade was not a success. If it was, move on to a practice trade to see how the backtesting methodology performs in real time.
Traders backtest stocks to analyze a particular stock’s trading pattern. This gives them a degree of security because the additional information provides a good indication of how the stock will act in future. Backtesting stocks is possible through a 10-minute chart or a more complex set of figures depending on a trader’s needs. It is dangerous to use backtesting data from a short period of time because price spikes could create an unrealistic pattern for the future.
It is necessary to open a charting program, adjust the data, and include as much information as possible when backtesting stocks. Choose a start date for the backtesting and scroll to the beginning of the chart. Follow the program’s instructions to start the backtest.
When the program is finished, check the results. Certain parameters should have been entered prior to the beginning of the test. Ensure that the program carried the test out correctly by making sure these parameters were met.
During the process, it is likely that certain parameters caused the trading system to produce an erratic performance. These must be changed before the test is repeated. If the first test produced satisfactory results, run another test using the same methodology. Continue using the same parameters when backtesting stocks until the results are consistent and the trading system becomes familiar and comfortable to use.
Then transfer the data to a spreadsheet. Some charting programs have a feature allowing the results to be exported. If this is not available, simply copy and paste the results. View the profit-and-loss section and look at the maximum balance gain and loss. Take note of the biggest single winning trade and the largest individual losing trade.
Once satisfied with the methodology used for backtesting stocks, start trading on a practice account. Pay close attention to how the trade plays out in real time. If the method used in backtesting turns out to be flawed, start testing again with different parameters. The test data is also of no use if the maximum drawdown during the testing procedure is exceeded during the practice trade.