Again we have some great information from “Topstocks.” This time contributed by “Nightstalker” a very informed professional share trader.

Topstocks are still offering a “Free Pro “account for one month with no strings attached. You can get there by clicking on the link provided. 22,000 Plus members can’t be wrong. So do yourself a favour and see for yourself.

“Backtesting, in Nightstalker’s words – is simply to look to the left of the chart and see if your method of entry and or exit works.

It doesn’t get much more simpler than that. I have often seen people tell me they will buy when this indicator crosses-over, or when that indicator does that – but have absolutely no idea if the method they are using, actually works on the stock or instrument they are trading in.”

“How to Back-test?

- Put together a TA strategy – perhaps one you have thought up yourself or one that you have been told/taught.

- Identify a timeframe for trading.

- Clearly define entry and exit points and optimize these as you backtest.

- Clearly identify a timeframe for testing – try and expose yourself to all market conditions (up, down and sideways). For stocks check out 1990-2000, the market was brilliant those 10 years – up, down and sideways.

“- Go right back to the beginning of the period you are testing and look for entry points that fulfill your criteria, enter the trade and exit the trade as if you were trading live.

Record the details of each trade in an excel datasheet, some programs such as IC investor actually have a backtesting function and record all the information including trade profitability etc at the click of a button.

Some useful things to keep track of include: Date of entry, date of exit, profitability, weeks to exit target, and a record of some info regarding the indicators you use for each trade.

- Perhaps note the performance of your strategy under different market conditions – how does it work in a bull/bear and choppy market? % winning trades, ratio of winners to losers etc.”

This all sounds like hard work … backtesting one strategy can take years… i would encourage you to do it in stages – first, find as much info as you can about the strategy you are using- if others have tested it before , they may be willing to share statistics – there are some books are available that show the relative profitability of some TA strategies.

Second, do some quick scanning of historical data without recording each trade in detail – does the strategy work or not on a broad scale? Third, if the strategy works, go into detail and proceed with exhaustive backtesting. Fourthly, paper trade. Finally, Trade Live!

There are far more “professional” ways of testing your system that i personally have never gone into, and for the time being, don’t intend too. There are also “gut-instinct” traders who simply buy and sell based on gut instinct… if it works for you- don’t let anyone change it.”

I will check out these two links as well that were mentioned somewhere along the lines as well.

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