Why It’s Important To Test Day Trading Strategies

Intro

You don’t need me to tell you about the exciting possibilities of day trading! With the right approach, you can make a lot of money (in a short span of time).

If you’ve followed my Investing for Beginners series so far, you understand that the vast majority of new traders FAIL in their first year of trading — and one of the big reasons centers around the strategies they use. With the right strategies and an understanding of patterns , you can make day trading work for you, achieve financial freedom, establish a full-fledged career and create wealth.

As we discussed in the past in this article, many strategies available online aren’t effective.

Once you’re able to figure out which strategies work and which don’t, you’re on the right path to building a successful day trading career. A strategy that you can rely on helps you trade without stress because you’re sure of the results. If you are unsure of your strategy (or don’t even have one), you’ll end up trading from your gut — which never provides predictable results.

Day trading doesn’t work when shooting in the dark. You can’t just make random trades hoping to hit the mark. That can work occasionally of course, with some luck. But for consistent results you need a strategy. And I’m hoping that because you’re reading my blog you’re in it for the long haul and serious about making money.

In order to understand which strategies can work, you have to test them.

Strategies Is Important

How do you decide which strategies to use for trading? You must create and use strategies that fit your approach, requirements and that actually work! A strategy can be said to work if it leads to a win over 70% of the time (with at least 20-25% profit returns). These are numbers I have arrived at after immense practice and experience.

So make sure the strategy you choose hits these numbers. But it’s impossible to figure out these numbers unless you first TEST them! After all, you don’t know what works until you test it.

Testing strategies is one of the most important steps while developing a trading system.

Testing strategies is one of the most important steps while developing a trading system. If tested properly, it can help traders select and build on their strategies, pinpoint any flaws, and gain confidence in their strategy before using it in real world markets. The results of testing strategies allow us to figure out the effectiveness of a strategy and therefore tell us if we should use them.

Some reasons why testing strategies is important:

Performance Check

In order to call any strategy useful, we have to be sure of its performance. We have to estimate its profitability! A strategy has to be at least mildly profitable for it to be called useful and yield profits over 20-25% of the original amount invested.

Any losses incurred while testing a particular strategy should be considered warning signs and if it provides more losses than wins (consistently), the strategy is low on performance and should be discarded.

Gain Confidence In The Strategy

Unless you’re a seasoned trader with years of experience, you need to test a strategy in order to be confident about it. Only when you know about its performance should you feel confident using it in the real market.

Before you start to trade in the real market, make sure you know how your strategy performs. Without testing a strategy, you’ll have no idea what the results could be.

When you don’t have a strategy in place, you tend to rely on your gut. This will give you sleepless nights and is why 94% of new traders fail during their first year.

Ensure Consistent Results

Sometimes we might think a strategy is working, start to use it in the real markets, but after a while it starts to produce a series of losses. You figure the strategy isn’t working anymore, start to look for a new one until that also gives you losses and the entire cycle repeats again.

This can be avoided if you test your strategies thoroughly before using them. Consistent profits are the only way you can sustain yourself in the game because consistent losses can very quickly wipe your account.

Strategy Successful

It’s worth keeping in mind that it’s often the clear cut, uncomplicated strategy that proves the best. With time, experience, and observation of statistics, I have come to realize that a good strategy is one that satisfies the following criteria:

20-25% profit returns

Being dejected is not something you can afford as a beginner, as it brings on that fear that leads you to trade and make decisions based on your emotions and impulses. Emotional trading is one of the worst things you can do (especially for a beginner).

This is what leads to most beginners failing and quitting. Trading has immense potential to help you earn money and so if you’re not going about it properly you are losing out on a world of opportunity. It’s been my mission in recent years to ensure beginners stick with it and make money!

Reading and learning about strategies will definitely give you an edge. Being aware of what strategies exist will help you get started. But it’s testing them that takes you to the next level. There are two main steps to learning how to choose and develop a strategy. The first is to study (a lot), and the second is to work with a mentor. Once you have the experience of working with a mentor, the right choices of strategies for a situation become second nature.

Test A Day Trading Strategy

To test a day trading strategy, you can take the following steps:

1.

Look At Historical Data

In order to check if a strategy will work for a particular trade, it’s important to see charts throughout the years to see its full history. If you look closely and analytically, old charts tell you everything you need to know about the future.

Historical data helps you make an informed decision on whether you should choose a strategy or not. And this decision comes from logic arising out of history rather than emotion.

2.

Live Testing

This can be done with paper trading or testing in the real market with a small amount. It might take up to 6 months to a year. Paper Trading is one of the best ways you can do that.

To backtest a strategy properly you need real-time paper trading that is in sync with market data for the most realistic experience. Because of this, I have to mention the platform I’ve been building: StockCraft.

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StockCraft Platform

StockCraft is one of the only platforms out there that allows you to use it without putting money into a live trading account. Yes, you can run Paper Trades in StockCraft without having to put thousands of dollars into your account like you have to in almost every other platform.

This makes testing your strategies A LOT easier!!!

Next Steps

Now you understand the importance of creating your own strategies and testing them, you should also know this takes guidance, time, and experience.

It isn’t something you can learn by reading a few articles or watching some videos. This is ultimately why my students join The Freedom Challenge.

I show them what day trading strategies to focus on (and which ones not to), and then SHOW them how to make them work for their own situation. I cannot teach something like that in an article like this one. All I can do is give you the basic information to go out and figure the rest by yourself.

So if you’re interested in learning, keep up with this Investing for Beginners series as we’ll get into more topics gradually. I’m devoted to helping beginners make day trading their primary source of income. I will need the same dedication from you if you wish to build a thriving trading portfolio.

I also invite you to take a few further steps with me:

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