Building a Successful Stock Trading Strategy:
The Importance of Back-Testing and Forward-Testing
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Testing is everything. It includes Back-Testing and Forward-Testing. And all
these need time, even years long time. Please be patient. Warren Buffett
said:
“The stock market is a device for transferring money from the
impatient to the patient.”
It is true.
No matter how advanced
or simple a stock trading strategy may be, it should not be used in real
markets before it has been thoroughly tested, including both back-testing
and forward-testing. These testing methods are critical for evaluating the
effectiveness of a trading strategy and identifying potential flaws or
weaknesses before putting capital at risk in live trading. By using these
testing methods, traders can gain valuable insights into the performance of
their strategies and make adjustments as needed to optimize their results.
In short, testing is a necessary step in the development and implementation
of any successful trading strategy, regardless of its complexity or fame,
even it is recommended by some big guys.
Finally, it's important to
diversify your portfolio and not rely too heavily on a single trading
strategy or stock. By spreading your investments across different stocks and
strategies, you can minimize your risk of losses and increase your chances
of generating consistent returns over the long term.
Legendary
martial artist Bruce Lee once said,
“I fear not the man who has
practiced 10,000 (types of) kicks once, but I fear the man who has practiced
one kick 10,000 times.”
The same philosophy applies to stock trading
strategies. It's not so important how many different types of stock trading
strategies we learn; what's crucial is that we choose one strategy to study
deeply, understand every part of it, and thoroughly back-test and
forward-test it.
Without proper testing, any fancy trading strategy
could turn into guesswork, or even worse, gambling. But “practice one kick
10,000 times” is not so easy; we should say it's a tough job. Manually
testing one stock trading strategy 10,000 times is a hard job for anybody,
not to mention if we want to test 100 stocks, each one testing 10,000
times... To overcome this challenge, we need effective methods and tools to
assist us in our trading journey.
Excel and VBA just provide such
methods and tools which we need and help us complete repetitive tasks, which
are often considered “boring”, by low costs.
Our
tutorial handbook is offering some methods and tools to execute these
testing and verifying tasks. You can download it for free, click here:
LIGHTING THE PATH TO PROFITABLE TRADING: A Step-by-Step Guide to Building a
Trading Strategy Verification Tool with VBA Macros. In this handbook, we
have shown you how to build a simple tool to verify your trading strategies'
effectiveness, even if you don't have strong programming skills. By using
Excel and VBA, you can create a back-testing and forward-testing spreadsheet
that will allow you to test your strategies both on historical data and
up-to-date fresh data. We hope that this tutorial has provided you with the
knowledge and skills you need to start building your back-testing and
forward-testing tool and testing your trading strategies. Various financial
instruments, such as stocks, Forex (foreign exchange), options, futures,
cryptocurrencies, and bonds, among others, can be tested using the same
back-testing and forward-testing techniques and tools to evaluate the
effectiveness of different ideas, methods and trading strategies.
And click Free Trial to download strategies testing tools, all for a 30-day Free Trial.
Click on Subscription to order more strategies testing tools to help your stock trading.
In theory, the more parameters we scan, the higher the chances we
have of finding the "best" parameter setting.
For sure, if we really spend
several days to scan some large parameter combinations, we may see some
beautiful and exciting numbers.
However, in reality, this attempt
can lead to two potential negative effects. One is overfitting, where the
current "best" parameters may not guarantee the best performance in the
future. The other is the long time it takes to consume.
"Be moderate
and balanced without bias, how strong and resilient this is!" - "Doctrine of
the Mean" "Going too far is as bad as not going far enough." - "Analects"
by Confucius (551~479 BC.)
Yes, going to extremes is never good.
Therefore, we need to become familiar with these back-testing tools,
practice again and again, find the balance suitable for us, and confirm it
through forward-testing.
Don't be scared of those complicated codes.
Go ahead and practice. Codes are not your enemy; when you practice enough,
codes will become your army.
"Whatever you do or dream you can do –
begin it. Boldness has genius and power and magic in it." - Johann Wolfgang
von Goethe (1749-1832)
In conclusion, we'd like to share some wisdom
from notable strategy masters throughout history. Perhaps we can learn from
them:
“SCIENCE MUST BECOME ART” “Knowledge must, by this complete
assimilation with his own mind and life, be converted into real power.” -
"On War" by Carl von Clausewitz (1780–1831)
And:
“If, before a
battle, one has calculated and tested their strategy and believes they can
win, the chances of victory are high. If the calculations show that they
cannot win, the odds of victory are low. A detailed strategy and thorough
calculation lead to victory, while a rough strategy and calculation has no
chance to win, moreover, much less without any strategy or calculation at
all." – "The Art of War" by Sun Tzu (a Chinese military general, strategist,
philosopher, and writer who lived during the Eastern Zhou period of 771 to
256 BC.)
Although I have referenced many quotes and metaphors about
war and battle in this tutorial handbook while discussing trading and
competition in the market, I want to make it clear that I am a big fan and
lover of peace. I pray for harmony and tranquility to reign once again on
our beautiful planet. I wish everybody good health and happiness, regardless
of whether they are rich or poor. Gold cannot bring our loved ones back once
they have left us.
But love and peace never die.
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