Your trading system needs thorough testing before you decide to trade live with it. A trading system might comprise of a set of indicators. You need to know how well your trading system and its set of indicators work in a particular market.

How to do backtesting? Using a backtesting software makes it very simple and easy. Backtesting uses historical data to test the performance of the trading system under the past market conditions.

Backtesting results are no guarantee that the trading system will perform well under live market conditions. Things that worked in the past might not work now. Similarly something that didn’t work in the past, may work now! You never know!There are many problems with historical data. There is no slippage in backtesting. Slippage is one of the most important problem that a trader faces while trading live. The other problem that the backtest ignores is the widening of spreads under volatile market conditions.

So when you look at back testing results, you should look at them with scepticism. But it doesn’t mean that backtesting is entirely useless! What we can say is that no two trades are exactly alike.

Some markets are highly seasonal. For example, if you are a commodity trader and tend to trade agricultural commodities like the grain, seed or the livestock, these have a fixed planting and harvesting cycles.

On the other hand, you might not find much seasonal trends in the currencies and bond market. Some though talk of the January Effect but this effect is not that pronounced now a days. In case of stocks, stock prices tend to rise at the end of each month and the first few days of each new month as institutional investors tend to put new money to work during that time frame.

US Dollar Index trendlines might last for months to years. In other markets too backtesting can help you figure out important trends that lasts for last times. Backtesting can help you figure out how long a trend might last in a particular market.

There is no substitute for live trading results! To tell you the truth, backtesting can only give you a rough guess about the performance of the trading system under live trading conditions.

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