Essential or optional?
Some time go while learning how to trade profitably myself, I found myself getting frustrated with the amount of jargon and terminology I had to become familiar with.
The terms “option writer” and “option taker” for example didn’t seem to be very descriptive to me, and other terms seemed to be interchangeable, such as Forex and currencies.
Backtesting and paper trading are often talked about that way as well, but regardless of how others choose to use the terms I view them as two separate activities and after reading this post I’m sure you’ll feel the same way.
What is backtesting?
To me, backtesting by it’s very name suggests the past, and going back over something to test it out.
So the process of backtesting involves looking at past data to try and determine how profitably a particular trading system might have been on that data.
Paper trading on the other hand suggests to me a more active and ongoing process, and I consider it to be the equivalent of live trading without actually placing the actual trades.
Therefore paper trading involves using ‘paper money’ instead of any real money, but the trader experiences the process of trading first hand.
Ok, so now that you know the definitions I use, it’s time to ask some hard questions. These are written asuming that you are already trading live, but you can reword them from ‘did/do’ to ‘will’ if you are yet to start.
1. Before you stated trading any specific stock or market, how much data did you backtest? (Eg, 6 months, 1 year, 2, 5, etc)
2. Did/do you conduct a backtest on every stock or market before you trade it live?
3. When looking at your backtesting, do you ensure that you’ve back tested in all market types? Eg, bull, bear and sideways?
4. How long do you spend paper trading a stock or market before you start trading it with real money?
5. Are you happy with your trading results?
These questions are for you to ask yourself, but I’d still like to read some comments from people that have traded with or without backtesting and/or paper trading, and they don’t have to be answers to the above questions.
Happy Trading
Brian Dibbins
Trade Profitably © 2006 - 2007
22nd July 2007
Click here to return to the articles list
