Back-Testing Trading Systems - Testing Trading Systems
Generating Signals with a system is one of the easiest method to trade Indices, it is the best way that a Stock Indices beginner can attempt to determine the direction of the market trend with a good level of accuracy, & with a little back testing on practice demo account so that to gradually increase the level of accuracy of this signals strategy
Best way to backtest a Stock Indices strategy is by following these two steps:
- Index Paper Trade
- Indices Demo Trade
Stock Index Paper Trading- This method of testing a system involves placing your system on the charts, then take the chart back to a particular date, 3 months back for example, & then using this trading chart history to determine where your strategy would have given buy, sell and exit signals. Write down these points and the profit per trade transaction on a piece of paper & then calculate the total profit after you have recorded a good number of Stock Indices trades such as 50 paper trades Stock Indices transactions and determine if your trading method is overall profitable, win ratio, loss ratio & the risk: reward.
This is an ancient method of testing Stock Index systems that was used by traditional investors when there was no online exchange markets or computers for that matter, trader would use something like the A3 or A2 paper, graph format paper & plot the charts manually (Imagine plotting the charts on your platform software by hand each day each hour, would you be ready to do that? I doubt) Those investors were hardworking than most, some were so used that they still continue to paper trade the online market & plot the charts on paper, anyway for our paper method example, just a sample data of 50 Index trade transactions is all we need.
A good tool to use to backtest your system is known as the MT4 Step by Step Tool. Found on the MetaTrader 4 Index charts toolbar of MT4 Index platform, If you want to find the charts toolbar in the MT4 platform it's at the top of the MT4 software. If it is not: Click View (next to file, top left corner of MT4)>>> Tool-bar >>> Charts. Then click the Customize button >>> Select Step by Step >>> Click Insert >>> Close.
MT4 Software Chart Tool Bars - How to Trade Stock Indices For Beginner Traders
MT4 Chart Tool Bars - Step by Step Button for Testing Trading Systems Explained
Once you find this MT4 Index tool you can move your chart backwards, & use this MT4 Index tool to move the charts step by step while at the same time testing when your system would have generated either a buy or sell Stock transaction, & where you would have exited the Stock transaction, then write down the amount of profit/loss per trade transaction and out of a sample number of Stock Index transactions you would then calculate the overall profits/losses generated by the strategy.
If your strategy is profitable on paper method then, its time to practice trade & testing if the it's profitable on the real market as it's on paper method. This is the process of testing or back testing a system.
Maintain a Journal to keep track of profitable Stock Indices trades, & determine why these Stock Indices trades were profitable. And also keep a log of all losing Stock Index trades, determine why these Stock Indices trades made a loss and the avoid making these same mistakes the next time you trade using your strategy.
Tweak your trading system until you get a good risk: reward ratio, with the signals that you generate. Aim for a good risk: reward of 3:1 and a win ratio of above 70% is a good ratio, with good equity management even a Indices strategy with a win ratio of even 30% i.e. Less than half of your Indices transactions earn profit you can still earn profit. You may want to study this lesson to know what the table below is all about: Risk to Reward Ratio.
Risk to Reward Ratio Chart of Money Management Strategy - Trading Strategies Explained
A manual system is still the best way to generate signals compared to automated systems, a manual strategy is a better method and is also much simpler to implement.
However, other traders prefer automated systems and for those then they can check the information on this page MQL5 Expert Advisors and automated systems.
You can also view our extensive list of Stock Index strategies topics that provides you with various methods of buy & sell technical analysis using a number of diverse technical methods, go to Stock Indices Strategies Section.
