I read a remark by a forum member on another site earlier today that indicated that each and every investor should back test their system for at least twenty years. I disagree and will now tell you why. Back testing and paper trading appear to be the most over emphasized techniques made available by market theorists, educational elite, market novices and/or marketplace angels.
While studying the pure fundamentals, I can see why a novice investor might want to paper trade; to find the outcomes of the growing system but I’ll warn that these results are entirely untrue. The results won’t include the emotional decisions that come along with risking your own money. Anyone and I mean anyone can paper trade successfully. It is easy, place a trade and hope it goes up and if it does not, you don’t have any worries because you can not lose. The psychological imbalance that occurs when you start to eliminate money isn’t present. Do not fool yourself by considering the results of your paper trading or digital simulation portfolio. These things may give you some confidence in your system but they do not prove a damn thing in the actual world. The actual world, especially the stock exchange, is run by psychological human beings. Folks make decisions which are irrational and base their trading decisions on greed and fear. Paper trading lacks greed and fear because there’s absolutely no profit and no loss; hence there’s absolutely not any consequence to take care of.
Do not worry about back testing for 20 years since historical back testing is not very accurate. The most accurate testing is real time. If you’re able to back test actual trades (actual trades you’ve made in the past), then this could be just like real time analyzing (or forwards testing). Back testing can get you a bit of an idea of how the system will perform but there isn’t any emotional attachments to this sort of testing so it’s not realistically accurate. All of us know emotions are tied to our decisions in the markets so we could only get precise results through actual testing. Learn how to ignore the talking heads and the people on TV and that internet chat room that claim they’re around 1000% investing in a fake accounts. What makes me laugh is the individual that sets up a virtual trading situation and then enables each participant to exchange $500,000 or more in their accounts. If you will exchange a fake account, at least keep it real so that you try to learn something, perhaps money management.
I set up one virtual trading contest a couple of years ago and I just allowed each participant to begin with $10,000, a fair amount, a sum that most individuals start trading with. The contest was fun but it wasn’t real for me or others. I didn’t care what dangers I took and that I never had a problem pulling the trigger that will happen in real life. I did try to keep my transactions in accordance with my real life account but it varied slightly. I witnessed other dealers making 20 trades every day or 20-50 trades weekly. This isn’t true because the commissions alone, even with a discount broker will wipe you out. I did allow margin since I use margin in my account but I saw other investors abusing the fake power of margin in their virtual account, again, playing the sport for pleasure rather than learning something valuable. As a fellow investor, keep testing your system in real time and you’ll learn what works and what doesn’t based on actual transactions, not simulations. Professors and the like instruct concepts while investors actually do the trading! Back testing may convince a few people but I am only convinced with what works today, in real time. Besides, why would I waste my time playing for fake money when I could learn and do for real? Back testing might be useful for some people but I have been analyzing my systems in real time because the day I started investing seriously. Currently, I’m testing the $60-$100 concept using options in my new account. I won’t have concrete information on this system for another couple of years, probably two years later on. I could back test the system but how will that help me realistically going forward? It won’t, it might show me some probabilities and the potential expectancy of the machine but it will not guarantee anything until I put a position for real.
If you would like to test a system, open an account with real money, even a minimum amount and give it a go. Be certain to use enough cash to allow emotions to be connected to your own decisions. With no emotional attachment, you’re cheating yourself and your prospective system.