When completing a backtest in a market it is crucial to understand ten dynamics to see if the system is viable for trading live with real money. While backtesting can’t ensure that you will make money going forward using backtested parameters and signals a backtest can tell you what did not work and the past and will likely not work in the future. A backtest is best used to see the principles that worked in the past to catch trends or execute a high winning percent trade.
Be aware of these 10 dynamics of any backtested system.
- What was the return over the period of the backtest?
- Did this return beat buy and hold investing in the market over the same time period?
- What was the maximum drawdown during the backtest?
- What was the winning percent of the system?
- What was the biggest single loss?
- What was the longest losing streak?
- How many trades account for the profits?
- Did you backtest through different types of markets like range bound, up trends, and down trends?
- Do the annual yearly returns meet your goals?
- Can you handle the equity curve is real time?
First you have to find a winning trading system then you have to figure out if you would be able to trade it yourself over the long term.