Importance of Backtesting
In the past, there are said to have been countless cases of people getting married without even looking at their partner's face.
Since these are stories I heard from my parents and grandparents, it’s not about the Edo period or the early Meiji era; until just a few decades ago, Japan was a society with limited options in many ways.
Turning to the present, diverse values are recognized.
For example, same-sex couples have become socially accepted. A drastic change like this probably surprised both supporters and detractors.
Also helped by the spread of the Internet, information is abundant in many fields.
No matter what you do, there should be time to think calmly, yet paradoxically it seems harder to choose a path forward.
Because there is so much information, there is a tendency for thinking to stall because people ask, “What is the right answer?”
In stock trading, there is a stronger tendency to act hastily, without calmly organizing the large amounts of information.
Ultra-low interest rates, pension system confusion, aging society… these anxieties may be contributing factors.
So people start thinking, “Should I actively invest?”, but for beginners the hurdle seems high.
However, with the increase of online securities, the hurdle has likely lowered in some respects.
Those who become motivated think, “If I don’t do it quickly I’ll miss out,” and act without adequate preparation.
Even if there is someone they like, they probably won’t propose right away.
First comes courting or dating, a certain sequence of steps is preferable.
Even experienced pro traders start slowly and cautiously when trying a new method.
From casual settings like pre-scoping a drinking party venue to test driving a car when buying, trading can tilt important money toward extremes; in some cases one should approach new phases with a cautious, even “knock on a stone bridge before crossing” mindset.
Because information is abundant, there is a tendency to feel the risk of not taking action (opportunity loss) and to engage in flashy behavior compared to one’s real self, which may be a tendency of us modern people.
Short-termismThere is a word. It is translated as “short-term oriented thinking.”
In investing, this attitude of seeking short-term profits at the expense of the proper long-term approach is viewed as a social issue and is negatively called “short-termism.”
But it isn’t that all old investors were cautious.
There were plenty of conversations like, “What? Is that stock good? Okay, I’ll buy it.”
That human, flawed side is interesting and surely a driver of stock prices, but as mentioned earlier, it is a trait that should be cautioned from a risk management perspective.
With the development of computers and richer information, the concept of “backtesting” was born. It means formalizing trading rules and testing buying and selling performance using past data.
When you think about it, this isn’t a truly new idea.
When starting discretionary trading, a person with certain experience and caution will look at the chart and think, “Will it work? (Will it be profitable?)” and verify.
Because we use the katakana word “backtest,” it merely feels novel.
However, as information and knowledge have become richer than before, more people probably want to think with a somewhat more scientific perspective.
While the whole scene becomes short-term, instantaneous, and lightly driven, a good environment has been prepared for those who want to think about theory.
Of course, profits in an unknown future aren’t guaranteed by past data testing, but it will undoubtedly provide one objective answer.
In trading, you take action while fearing an unknown future, so “execution ability” is the key. While valuing this mindset, it is worth knowing at least the concept of backtesting, which applies rigid formulas to past data.
On June 30 (Thursday), the blog will discuss the similar concept of “forward testing.”
Stay tuned!
■Stock Investment [Tiger’s Den] (Hayashi Investment Research Institute Channel)
On June 24 (Fri), we uploaded the latest video.
Stock Investment [Tiger’s Den]
Stock Investment [Tiger’s Den] The Past Is Not a Mirror That Reflects the Future!
Market participants are looking at 100% past data. Yet what they are thinking about is future stock prices.
As a player, what is the ideal way of thinking, the ideal processing of information, and the proper course of action?
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