How To Backtest A Trading Strategy - My 3 Best "Behind The Scenes" Secrets

How To Backtest A Trading Strategy

Intro: 0:00
What Is Backtesting?: 0:20
Choose The Right Timeframe: 4:37
Test Each Stock Individually: 7:07
Backtest With The Right Data: 9:38

Number one, what is backtesting? It is the method of looking back to see how well a trading strategy has performed in the past.

It answers the questions of what results would I have achieved if I had traded this particular trading strategy over the past few days, weeks, months, or years. Why it makes sense?

Well, first of all, backtesting has a lot of limitations. Some things cannot be backtested when looking back. For example, you never know when exactly would you have gotten filled.

Plus, even if a trading strategy worked in the past, there's absolutely no guarantee that it will work in the future.

However, if a trading strategy didn't work in the past, it's very likely that it might not work in the future. If I get solid results through backtesting, I have more confidence in the strategy.

Let me show you a very specific example from the PowerX Strategy using a tool it's called the PowerX Optimizer.

So here you see the PowerX Optimizer. Every day it finds the very best stocks and options for me.

For example, ACLS that today is a "buy."

It shows me exactly what would have happened if I had traded this stock, according to the PowerX Strategy over the past year. So on a $10,000 account:
- I would have made $7,267. So that is an ROI, return on investment of 72%.
- I would have had a winning percentage of 52.82%.
- It would have had a profit factor of 3.13 and
- The average winning trade would have been $1,067, & an average losing trade of $468.

Having these numbers helps me to make a decision whether I want to trade this stock or not.

3 Tips For Backtesting:
1) You have to choose the right timeframe. Not too short, like a week because you don't have enough data. You want to look back long enough that you have also different market conditions.

So what is the perfect timeframe? Well, it depends whether you're swing trading or day trading. The PowerX Strategy that I personally use is a swing trading strategy that uses daily charts, and therefore, for me personally, I like to use one year.

2) You need to test each stock individually. For example, Apple is behaving completely differently than, let's say, Norwegian Cruise Lines, right? Right now in the United States, we have probably around 9,000 stocks that you can trade.

3) You have to backtest with the right data. So you need to make sure that the data that you're using for backtesting is representative for normal market conditions.

So backtesting has its flaws, but backtesting can help you to test if a trading strategy works at all, and that is true for me, it can give me more confidence to pull the trigger. Let's face it, what is the one thing that makes traders not pull the trigger? That they don't have confidence, that they don't believe in the trading strategy, that they second guess themselves.

Recommended Videos:
The Options Wheel Strategy Playlist: https://www.youtube.com/playlist?list=PLBa3sAx-Io2nosgosERUhIZwzvIgD-3Vq
Options Income Trading Strategies: https://youtube.com/playlist?list=PLBa3sAx-Io2mybLLdWtbjTFqK9-BR5SJb
The 5 Biggest Mistakes New Traders Make: https://youtu.be/DY_0lq_LdQc
Generating SRC Profits - Here's How To Do It: https://youtu.be/FP2x4JULzwU

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Видео How To Backtest A Trading Strategy - My 3 Best "Behind The Scenes" Secrets канала Markus Heitkoetter