Beginners in trading might think that they have a lot to learn. However, much information of trading is already taught in schools way before they have any idea of what is trading or a trading plan.
Have you seen the following elementary mathematics problem? To prove: A = B. The solution is to start from either the left-hand or right-hand side of the equation, and resolve the chosen side to be equal to the opposite side.
Proving the Trading Plan is Profitable
After a trading plan is formulated, you can prove whether the plan is feasible (or read profitable) or not, by backtesting the plan in as many financial markets as possible, using historical price data.
How much historical price data to use would depend on your strategy. Normally, I like to have 1000 or more executed trades in a backtesting simulation. Another point to note is that the more data being used, the longer a backtesting simulation would take.
For beginners with low budget, I would recommend MetaTrader and backtesting on forex data. Metatrader backtesting platform comes FREE with any Metatrader trading platform. You do not have to open a live account to do backtesting. A demo account will do.
For beginners with a good budget, start with Tradestation straightaway. It is used by professional traders for backtesting their strategies. If you aim to be trading full-time one day, use the same tools as the professionals.
Interpreting Backtesting Results
Attached here is the backtesting results of the One-Night-Stand strategy on the forex pair, EUR/USD over a period of 5 years from 2006.01.01 to 2010.12.31.
With a starting capital of $1000, the account has a profit of 176.79 over a 5 year period (17.68%). The Profit factor is 1.53 which means that for every $1 lost, we should be expecting to get $1.53 back.
The winning rate is 50.00%, which means that we can expect to lose/win half of the time in every trade. However, do take note of the “Maximum consecutive losses”, which is 4. This means that we can expect to lose for 4 times in a row. Therefore, if too much is risked based on the assumption that this strategy wins or loses half of the time, your account might be wiped out before you can weathered the 4 consecutive loses.
We note that there are only 68 trades, and this might not be enough for solid evidence that this strategy is profitable. With more time, I would certainly backtest One-Night-Stand strategy with more historical data.
Backtesting is not a holy grail but it does gives you an idea of how your strategy will perform in the future. For any newly devised trading plan that is not profitable, you can dump it immediately, rather than losing money.