Backtesting Biases Will Ruin Your Mojo! Here’s How You Fix It.

Your dogs are put away, and any potential financial crisis is averted because you now know about backtesting. Still, you want to know why Equities Lab’s software differs from other backtesting options. The software was created with a strong foundation to avoid biases that will put a new investor (an unknowing victim) in a tight position.

A backtesting bias will use inaccurate/bad data that results in inaccurate/bad results. Although some people end up with “positive outcomes,” is it really positive if the whole structure is flawed? A strategy might look good on paper and find “the best stocks,” but if it’s created through a backtesting system built on a foundation of sand, then it will end up washing away. 

Backtesting Biases to Avoid

The way to avoid backtesting biases is to know what biases play a role in the market. So what biases does Equities Lab avoid to get better performance results? 

  • – Lookahead Bias: The evaluation of a previous or current period of time using unavailable data, leading to inaccurate results. Using untested data will only inflate your results, making them wrong. 
  • – Survivorship Bias: Excluding stocks, strategies, assets, etc., that performed poorly in the past, leading to inaccurate results. The best way to find success is to learn from others’ failings, so excluding strategies that have failed will hurt your backtesting.  

How Does Equities Lab Avoid Those Biases?

Now that you’re educated on backtesting biases, let’s talk about Equities Lab’s software. The software gives a clear idea of how your strategy will perform. 

Your strategy will test against years of data! You can see up to 20 years of history, the dot-com bubble and crash, the Great Recession, and the PIIGS Euro-Crisis of 2011. Using only past data, which is released to the simulation a week after it is filed with the SEC (for fundamental data) or the next day (for pricing data) throws out the lookahead bias, and you can accurately see the twists and turns of the times without a timing bias. The other inclusion? Delisted stocks are a part of every simulation to avoid survivorship bias. You’ll see all the successes AND failings of the stock market.

Time to Get Started

With unlimited backtesting through Equities Lab that will help you grow as an investor, you can test your strategy against historical data so you can accurately improve results. Stay in tune with our latest content to learn the alternative backtesting strategies that avoid poor results (such as the “Buy and Hold” strategy).