Trading is a career heavily involved with and influenced by money. As people and traders, we are always trying to find ways to make money and stay profitable, but not many people understand that it is more important to manage your losses than it is to count your winners. A profitable trader is not someone who can predict the markets perfectly, it is someone who can effectively manage their risk.
One of the absolute best ways to manage your account is to learn how to do back testing. Back testing enables you to confirm strategies that you do not understand or that you maybe underestimate. You can see how profitable it is, how many trades would win and lose if you follow it to the tick, and you could learn some entirely new concepts by accident. Back testing is unfortunately a tiring process that requires at most focus and dedication. You must not be focusing on trades when you are busy, and you must look at your strategy with an open mind and be ready to either accept it or reject it – it is therefore, particularly important to maintain an open mind.
There are times when a strategy would be profitable up to a certain point and then could become unprofitable later. You could learn to take multiple strategies and use them to confirm each other – but you must be absolutely sure that they are complimentary to each other otherwise you have a losing system you wish was winning. Back testing is extremely valuable to new traders who are still trying to find their style and strategies, as well as experienced traders looking for new strategies.
When I started trading I was told to follow a strategy for few weeks and then I was told to back test it. I found that according to my strategy, entry was fine but its exit meant I was losing profits. I took this knowledge and tried to find a better way to exit winning trades before losing profits. I now use multiple strategies to find better ways to exit trades and although it has only been a recent discovery I am excited to see what comes of it. I am already improving my hit rate with only my first week of using my new ideas in conjunction with the new strategies I learn’t.
What I want people to see is that any single back testing that has been done properly has the potential to completely change the way you trade. This is invaluable to a trader. Back testing is extremely helpful in managing your losses as a novice trader and all traders should use it more often. Apart from back testing, but something that should be done congruently, it is important to keep statistics on every trade you make so you can see things such as your hit rate (profits vs losses), which time frames work for you on which strategies, what time of day you make the most amount of money and so on. If trading is mostly about managing your risk then your greatest asset would be statistics and that is essentially what you are doing with back testing.
Money management is more important than counting your winners, because managing your losses naturally improves your winners. Always look for where you will exit before making a trade rather than during the trade. The biggest mistake traders make, is that they want to make money and they want it now, rather than managing their money and allowing profits to slowly increase as they learn how to use strategies. Accepting your losses are easier when you have calculated your exits, and back testing is an excellent money management teacher.