Back testing is a way to test the trading strategy on the
historic data. Thus the strategy can be tested on the multiple time periods in
the history and it can be seen if the strategy works or fail. The two important
ways to practice and find the validity of the strategy are back testing and
paper trading. In back testing the validity of the strategy can be found in any
past period. There are many automated tools and software available to back test
the strategy. The strategy from very simple to most complex can be tested using
the back testing tools. The strategy may involve various indicators to execute
the buy and sell signals. There are various inputs to the back testing software
like the initial capital, stop loss levels and the various indicators and their
triggers. The software computes the profits and the loss incurred in the trades
and give the overall wealth accumulated taking care of the profit and the loss.
In paper trading the trading is done without real
investments. Thus various strategies can be practiced without the real
investment and one will have virtual profits and losses. Various strategies can
be tested and validated and one can test and find the success rate of any
strategy. Strategy from very simple to very complex can be traded and validated
with the help of paper trading.
The trader can trade with the help of a self devised
technique and strategy and can use back testing technique and paper trading to
confirm and validate the strategy. If the trader does not have the sufficient
knowledge about the stock market he can take the help of advisory firm to trade
based on their support. These advisory firms have expert technical analysts who
provide accurate stock tips. They provide accurate buy and sell calls with
proper stop loss.
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