Tag Archives: Back-testing

Trading Simulation and Back-Testing – What and Why

Stock trading strategiesInvesting in today’s markets can be a challenging, complex, and even intimidating experience. Not to mention that mistakes or faulty investment strategies can lead to financial loss and a lack of confidence in making future investment decisions. However, today’s technology and software tools help reduce such strategic misses and provide critical decision-making assistance for both experienced and beginning investors. Two such tools are Trading Simulation and Back-testing.

Trading Simulation – What and Why

Trading simulation is basically just what it sounds like. This is a software application that allows a potential investor to ‘pretend’ or simulate stock investments without actually making a real financial commitment. This allows you to test your strategy for investing without risking any capital to see how your logic for investing would work out from a win/lose standpoint.

By trying a mix of strategies through the simulation tools you can determine how well you’re reading market indicators and company information in making your investment choices. Modifying your choices and re-running the analysis allows you to further determine how small changes to your decisions would have impacted your results. It is easy to see how such a tool could be a considerable advantage to potential investors over those who do not have access to such analytical capabilities.

Back-Testing – How Can You Utilize It to Your Advantage?

Investopedia defines back-testing as a process that allows you to test your investing strategy against a past period in time to observe what the performance of your investments would have been over that time span. The benefits of such a tool are significant in that you can determine whether your proposed investment strategy would have resulted in gains or losses, and to what extent. Some of the valuable statistics provided to traders by back-testing software include:

  • Net Profit or LossNet percentage gain or loss.
  • Time frame - Past dates in which testing occurred.
  • Universe- Stocks that were included in the back-test.
  • Volatility measures - Maximum percentage upside and downside.
  • Averages - Percentage average gain and average loss, average bars
  • Exposure - Percentage of capital invested (or exposed to the market).
  • Ratios - Wins-to-losses ratio.
  • Annualized return - Percentage return over a year.
  • Risk-adjusted return - Percentage return as a function of risk.

As an example, you can evaluate the results you would have experienced if you had invested in oil stocks during a period of political unrest in the Middle East. Let the tools tell you if your choices would have realized gains or losses.

How Do You Get These Tools?

One consideration to keep in mind is the investing caveat that past performance is not a guarantee or promise of future results. Nonetheless, such tools bring obvious advantages to those investors who have such a tool available for their analysis of investment choices.

As with any highly-technical tool, you need to understand the criteria entered into the simulation and back-test software to get reliable results that are comprehensive and meaningful to you. Use of these software products requires some understanding of their functionality that can be provided through the software vendor or provider’s support team.

Whether you are investing for the long term or day trading, arming yourself with powerful analytical tools can provide you with a significant advantage over investors who do not have such software available to them or do not understand or make use of its capabilities.

DasTrader is a leading provider of sophisticated investing software including desktop and mobile applications that facilitate efficient reliable trading and analysis for traders of every experience level. We are constantly striving to improve the reliability of our software to the benefit of our clients. Visit our website today for additional information or contact us today to discuss how DasTrader can improve your investing experience.