Bitcoin has transformed the lives of many people in the world today. A lot of people that took the bolding step of quitting their jobs to focus on trading full-time are reaping tremendous profits from that gut-wrenching move. Now I am not saying you should quit your job but it goes to show how profitable it will continue to be in Bitcoin and other cryptocurrencies. Here comes the flip side, no matter how successful people have been trading Bitcoin, take nothing away from the volatility of the digital currency. Let no one kid you by saying you will not make losses, you most definitely will. But the trick is to mitigate the losses to their barest minimum and up the profits to the maximum. Trading is more like the survival tactics we employ in life. Sure, there are good days and bad days but our prerogative is never to let the bad days outweighed the good. The learning prices emanate from both good and bad days.
Consequently, to survive in trading just as much as in life, you need strategies to navigate through shackles of mediocrity. Everyone wants to make it big but the successful implementation of life strategies can only take you to your goals. Trading employs the same theme, for traders to be successful there has to be a tested and trusted price that guarantees more profits than losses. Ne of such strategies is Back testing.
What is Back Testing?
Traders and analysts want to be able to find the perfect times to enter and exit the market. Hence, they deploy strategies that allow them to detect the best points to but and sell to make maximum profits and reduce losses. Back Testing is one of the methods through which traders use by analyzing the historical data of a particular period in the market. This method allows traders to test trading strategies that will work based on the historical data and the trend of the current market. If the trader sees that the strategy, he or she is hoping to use matches with the results of an articular time frame, then that method is a go for the future. It takes careful analysis of past events (historical data) to navigate the current market and proffer solutions for future trends.
Back Testing is carried out without any money in the trading accounts but is used to check the viability of a trading idea. As long as the idea can be quantified in numbers (Date and figures), it can be backtested. When traders backtest they look for a particular time period that has different market trends. It enables them to cope with any kind of situation the market flows to in the future. The theory behind Back Testing which traders live by is, as long as a trading strategy worked well in the past, there is a high possibility it will work again. There are factors that traders look at to carry out a successful Back Testing operation, some of these factors are as follows:
*Volatility: This indicates the measure of the uptrend and downtrend
*Ratios: The profit to losses ratio in the market is considered also.
*Averages: The percentage of average gain and losses in the market.
*Capital: How much capital was invested in that time frame being reviewed.
*Net profit and losses.
Based on the aforementioned factors, here are some tips to work when using Back Testing to determine trading options:
It is important to note that Back Testing is not the strategy itself but a method to check the viability of a trading strategy. One of the things you need to consider as a trader is the time frame. I understand many people might scoff at that but there is more. Choosing a strategy that was only backtested during a particular trend in the market might not fare well when there is a change. Traders take into consideration all the possible outcomes as they select a time frame to test their strategies. This is where scenario analysis comes into play, this method is based on the hypothetical analysis of possible outcomes based on the current situation of a market. So, if you want to use Back Testing to validate your strategy, note the kind of season we are in. The same strategy used in a bullish season will definitely not work in a bearish season.
Based on the volatility of the crypto market, situations can change in an instant. Prices can rise as high as +120% in a matter of minutes. The probability of a strategy working effectively because it worked in the past, is subject to volatility. You might be correct in your analysis and you might just fall short, even if you are using Back Testing software, there might be some changes that you never envisaged. Therefore, the application of Back Testing, and another method is imperative in deducing the right entry and exit points. The forward performance testing otherwise known as the paper trading method is a great addition to Back Testing. The paper trading method provides traders with mapped-out sample data to make simulations of actual trading done in a live market. This means as the events are unfolding in the market, traders are noting every move but without actual money.
It is important for traders to follow the system’s logic to the letter to avoid falling short of their evaluation. This will ultimately ruin the effectiveness of their strategy All notes and information gotten from the paper trading method are documented on paper.
In conclusion, Back Testing is only effective when the strategy goes well with the time frame and the current market situation. It will be traffic to rely on past events only and forget about what is happening in the market currently. As a trader, understanding the past events, linking them to the current issues will enable them to make informed decisions when picking trades. These strategies separate the elite traders from the cherry pickers. The only thing separating you from achieving top-rated trader status is the proper application of strategies. As you cannot go through life without a plan, so too your trading journey cannot be fruitful without strategies.