Building a Successful Stock Trading Strategy:

The Importance of Back-Testing and Forward-Testing

 

 
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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