Back-Testing Trading Systems - Testing Systems

Generating Signals with a system is one of the easiest method to trade Indices, it is the best way that a Index beginner can attempt to figure out 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 trading signals strategy

Best way to backtest a Index strategy is by following these 2 steps:

Index Paper Trade
Index Demo Trade

Stock Index Paper Trading- This method of testing a system involves placing your system on the charts, then take the trading chart back to a given date, 3 months back e.g., & then using this trading chart history to figure out 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 and then calculate the total profit after you have recorded a good number of Stock Index trade positions like 50 paper trade positions Index transactions and determine if your trading method is over-all profitable, win ratio, loss ratio & the risk : reward.

This is an ancient method of testing Index systems that was used by traditional investors when there was no online exchange markets or computers for that matter, trader would use something such as the A3 or A2 paper, graph format paper & plot the charts manually (Imagine plotting the charts on your software platform 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 illustration, just a sample data of 50 Index trades 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 MT4 Index charts tool bar of MT4 Index platform, If you want to find the charts toolbar in the MT4 platform software it's at the top of the MT4 platform 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 >>> Press Insert >>> Close.

MT4 Platform Chart Toolbars - How to Trade Index For Beginner Traders

Back-Testing Trading Strategy - Testing Systems

MT4 Chart Toolbars - Step by Step Button for Testing Systems Explained

Once you find this MT4 Index tool you as a stock indices trader can move your chart backwards, and 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, and where you'd have exited the Stock transaction, then write down the amount of profit/loss per trade transaction and out of a sample number of Index transactions you'd 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 Index trades, & determine why these Index trades were profitable. And also keep a log of all losing Stock Index trades, determine why these Index trades made a loss and then avoid making these same mistakes the next time you trade using your strategy.

Tweak your system until you get a good risk: reward ratio, with the trade 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 make profit you as a Stock Index trader can still make profit. You may want to study this lesson to know and learn what the table/illustration below is talking about: Risk to Reward Ratio.

Back-Testing Trading Systems - Testing Index Trade Strategies

Risk to Reward Ratio Chart of Money Management Strategy - Trading Strategies Described

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(EAs) 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 Index Strategies Section.

Study More Tutorials:

Trade Stock Indices

Back-Testing Trading Systems - Testing Systems