Hello All,
I am brand new to this forum and I found the responses to "what I wish I would have known..." to be very insightful. One response said to spend more time backtesting and papertrading that you think you need. This seems like very solid advice.

I have recently opened a few accounts so that I can start learning the platforms. Other than a few random trades I made 20 years ago I have not actually done any trading. I have done fair amounts of research and invested in a self study course that specializes in exploiting trends.

I am at the point where theory meets reality and I am trying to find a thorough tutorial on backtesting. I have access to Charles Schwab Trading platform, TradeStation, FINVIZ elite, and Stockfinder.

I had assumed that backtesting would be very similar to using a stock screener, but I see thespe are two very different animals. Stock screening seems to be fairly intuitive but I find backtesting to be much more elusive.

It seems like backtesting is really one of the keys to successful trading but I don't even know how to begin learning how to backtest. I do have some strategy theories but I don't know how to make the backtester do what I want it to do.

Any thoughts?

Thank you for your time!

Tom

Backtesting is just one part of the overall process of strategy development, hypothesis falsification, etc. I think that market cognition is just as important. You do not hear many people talking about market cognition though but market cognition is what really drives the market. Market cognition is often much more difficult to backtest because it doesn't rely primarily on statistical verification but rather on forward thinking, analysis of other traders, and unknowable speculations.

Examples of market cognition:

(1)
A speculation is formed based on rational insight. Backtesting or hypothesis falsification (not verification) can be used to falsify either of these statements.

A. Interest rates are expected to go up in the near term. So, borrowers will rush to borrow money and deploy it before they go up.
B. Interest rates are expected to go up in the near term. As such, house prices will be pressured. Borrowers will be more selective.

(2)
Below is another form of market cognition which can not be verified by simple price stream, i.e. may have been made in 07 or 08.

A. US wages have been under pressure for many years. As such, credit is likely to be destroyed and this credit destruction is likely to cause many housing defaults.

Im order to turn (2) into an actual trade you will need a specific trading plan where backtesting or a term more generally useful, simulation could be used to figure out various risk/reward scenarios.


Unfortunately, even with a quantitative empirical framework of analyzing markets backtesting is merely part of the process, a very important part but just a part. You could learn Tradestation's Easylanguage. If you have a Fidelity account, you could try Wealthlab too which you might find easy to test as a beginner. Paper trading is useful but it is possible to paper trade for too long too. This is more of an issue with discretionary traders though.

But what is important to understand is that traditional backtesting can only verify the form, I think that a pattern or signal A in the market is predictive of B. It cannot be used to test more advanced hypothesis that do not follow that form or that do not occur with statistical regularity. Simulation however might be able to test some of those scenarios and does not require statistical regularity.