How to test
your day trading strategy
What virtual stock trade options are available for testing of stock market strategies
There is necessary to prepare good day trading strategy to be able to make money by online electronic day trading. Testing is important part in the process of creation of any profitable intra-day trading strategy. Every online electronic day trading strategy must be tested before it can be used as part of profitable day trading system. This testing can be done by day trading simulation or by doing virtual stock trades.
Do you plan to trade one stock or multiple stocks in you stock market strategies ?
The first issue we have to know is specification if our online electronic day trading will use only one or few firmly preselected instruments. Do you plan to trade one one stock like some
index ETF
like SPY or QQQ or any particular
stock suitable for daytrading?
Another option is that our stock market strategies will trade stocks that will be selected discretionary or by some
stock screener
and the list of these stocks could be different every day or week.
Automatic day trading simulation - backtesting
When we plan to trade only one instrument then there are more options for testing. Qualities of our stock market strategies could be tested by backtesting and also by other methods described below.Backtesting is based on principle that we can check if our online stock trades worked in the past. If our trades are based on some formula that can be defined, then it is possible to defined strict rules for entries and exits. These rules could be put into some software -
automatic day trading simulator.
This type of simulator must have enough data about price movements in the past. If we want to backtest day trading strategy then day trading simulator must have also historical intraday data in its database. Then we define period for testing purposes, first and last day, and run the test. The day trading simulator goes through defined period, applies our rules to price and simulates trades. Results are recorded and published after day trading simulation finishes. Different software packages have different type of day trading simulation integrated. There is very good backtesting function in
Amibroker,
stock chart analysis software. Here is example of Amibroker analysis window.
Another good option is
Esignal
with its Strategy Analyzer. The eSignal Strategy Analyzer has six tabbed sections and more than 250 values useful for strategy performance analysis. Multiple modes of graph presentation and the ability to create personal settings for displaying the values of the report and analyzing the strategy make it ideal for customizing the strategy to meet your individual needs. Visually enhanced graphs and added functionality make back testing and strategy adjustments easy to accomplish.
Manual day trading simulation - backtesting
Another option for testing of any day trading rules is to do
virtual stock trades.
Such virtual stock trade is done manually by personal monitoring of price and decision that all rules are fulfilled and trade can be executed (entry or exit). There is possible to use historical data available in testing/charting software and use feature like Bar Replay. With this feature, you can step through your trading day bar by bar to assess your strategies and adjust accordingly. This feature is available in
Amibroker
and also in Esignal.
Esignal
feature has a fast forward and reverse capability, as well as the ability to step through the data a bar at a time, using your choice of playback intervals Data about any
virtual stock trade
could be recorded manually by writing into excel or similar spreadsheet software. There is also possible to open some paper trading account for day trading simulation. Then all trades are done in this
day trading simulator
and every virtual stock trade is recorded automatically. When testing period finishes we have to download recorded data about virtual stock trades into some good
stock trading journal software
where these data could be analyzed.
Forward testing with day trading simulator
There is also possible to test any strategy using
real time data.
To use current day and next days and made virtual stock trade in day trading simulator when needed by day trading rules.Again we have to record data manually or automatically with
stock trading journal software
and make evaluation. This real time testing is also important to do after previous backtesting as next step before live trading with real money.
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