Why Use Excel to Backtest Trading Strategies?
Learning to trade takes time and plenty of patience. In this article, I discuss why it is good to use Excel to backtest trading strategies.
What is a good trading strategy?
A crucial part of trading profitably is using a good trading strategy. Different types of strategies perform better in different market conditions and it can be useful to have more than one good strategy.
A good trading strategy is like a well-fitted suit. It must feel good as well as look good. A trading strategy must be a good fit with the personality and lifestyle of the trader as well as being profitable.
If the trading strategy does not fit in with the trader it will probably fail. A laid back, thoughtful trader should probably work on developing a slow patient strategy that takes big profits from large market moves. Those traders who get high on adrenaline and want to be constantly in and out of the market, should be trading high probability moves on the shorter timeframes.
Equally important is the time and ability to trade the strategy properly. A person who works 40 hours a week cannot reasonably trade a strategy that requires constant attention. It can also be difficult to concentrate on trading from home when the house is full of noisy children. Traders must be realistic about how much time and energy they can devote to their strategy.
How to develop a good trading strategy
The only certain way of developing a trading strategy that works for you is trial and error. Until you have traded a strategy live in market you will not know for sure whether it is right for you. There are ways to speed up the process of developing your own strategy.
Review your trading history
The financial markets have a way of teaching us the lessons that we need to learn.
Studying your past trades is very helpful for refining your approach to trading. See how you cope with difficult conditions. How well you stick to your plan and how much profit or loss you take out of each market move. Could you have got more profit out of your winning trades and cut your losers earlier?
For introducing new methods and for coping with different market conditions, backtesting is extremely important. Backtesting uses historic price data to see how trading strategies would have performed.
Backtesting needs to be done with care and past performance does not equal future performance. However, it is invaluable for weeding out strategies that have never been profitable and discovering weaknesses in apparently good strategies.
Backtesting is also very useful for establishing general trading principles for a particular market. For example, I carried out a series of tests using a random entry trading system. In these articles: random entry and random entry plus technical indicators. These tests showed me that in the EUR/USD market a random entry system can be profitable. I am not going to trade a random entry system but I am going to use the principles, such as a trailing stop as part of my daily trading in the EUR/USD.
Using Microsoft Excel
You can backtest using many different platforms but one of the easiest ways to test relatively complicated strategies is using Excel.
Excel is very accessible and most people already know their way around the software. It is very user-friendly and there is a huge amount of information available online about improving Excel skills.
Trading strategies are programmed using logical statements. Excel is one of the easiest environments to program. A huge number of technical indicators can be programmed and the trading logic can be as simple or complicated as needed.
In my Amazon Kindle eBook – How to Backtest a Trading Strategy Using Excel – I show how Excel can be used to develop your own backtest spreadsheets. If you are looking for a spreadsheet you can also purchase them directly: Purchase Excel Spreadsheets.
Learning to trade is a slower process than most of us would like. However, by using some of the ideas in the article it is possible to make it a quicker (and much less expensive) process.