January 3, 2019

Why backtesting will not help you earn money in stock markets

All traders keep searching for the holy grail which does not exist.

Every method will work only 50% of the time (TA, FA etc). Further, the method or tool does not get you the money.... I took years to understand this.

If you take 100 successful traders in a room and compare their methods (a successful trader is one who has had at least 1 profitable trade in a year), you will see that the trading tool or method is NOT the common denominator. It means the tool is not responsible for their success.

There is something else responsible for their making money and it is not the tool. And people spend so much time redesigning a system or tweaking an indicator or backtest more data just to get a better return or higher accuracy. All this is a complete waste of time.

Human beings like to be right more often than wrong. In the stock markets, this will work against you.

We like to have greater accuracy in our system... because our education system has always given more importance to the topper. In the stock markets, this will work against you.

You can spend years backtesting thousands of hours of data but the result or accuracy you have achieved via paper trading has no meaning in real life. Your system will have caught every single top and bottom but again it means nothing in real life.

What matters most is a simple statement - how much do lose when a trade goes wrong and how much you make when a trade is in your favour. That's all ... nothing else matters. You can make excellent money consistently even with a 51% accuracy (millions in fact, eg casino).

All traders need to be honest with themselves and ask this question. If they lose money, how much do they lose. Do they exit immediately or wait for situation to improve. And if they make money, are they capable of going for the entire kill or they exit with small profits? This is what defines the trader's edge and this is what gets him the money.

All new traders should spend a week trying to learn probability. You have already learned this in school so you just need to brush up.. this knowledge will help you earn a lot of money.

Accuracy means nothing. The best traders rarely have a success ratio of more than 40-50%. It is not required and a higher accuracy will actually be counter productive.

Accept the fact you will be wrong half the time. Then everything will be crystal clear.

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