Stock Screening Education
Once youve created a screen, you can then backtest it to see how good (or bad) your screening strategy has performed.
In other words, does your screen generally find stocks that go up once theyve been identified, or does your screen generally find stocks that get buried once theyve been identified?
This is good stuff to know before you invest.
With backtesting, you can see how successful your stock picking strategy has performed in the past, so youll have a better idea as to what your probability of success will be now and in the future.
Of course, past performance is no guarantee of future results, but what else do you have to go by?
Think about it; if you saw that a stock picking strategy did nothing but lose money, year after year, period after period, stock after stock, over and over again (you get the point), theres NO WAY youd want to trade that strategy or use that screen to pick stocks with.
Why? Because its proven that it picks bad stocks.
Sure, it may turn around and start picking winners, but it may also continue to pick losing stocks the way it always has.
On the Other Hand
What if you saw a strategy that did great year after year, period after period (you know where this is headed), youd of course want to trade that strategy.
Why? Because its proven to be a profitable trading strategy.
And while it may start picking losers all of a sudden, it most likely will continue to pick winning stocks, just like it had been doing consistently in the past.
Keep in mind, a screening and backtesting program isnt a box of magic.
But its a great way to see what works and what doesnt BEFORE you put your money at risk!
Dont get the wrong idea though. Just because you have a great strategy for picking winning stocks, it isnt going to prevent you from ever having another loser. Even some of the best strategies only pick winners 70% to 80%. (Never 100%.)
But if your strategy picks winners far more often than losers, then once you find yourself in a losing trade, you can quickly cut your losses and feel confident that your next pick will have a high probability of succeeding.
And if your strategy has proven to do good in both up and down markets, youll have a workable plan for your investments no matter what the market is doing.
And thats important. Because nobody really knows how the market will perform until after the fact. A lot of people who took a beating in 2001 and 2002 made the mistake of staying out of the market in 2003 for fear of another down year. Yet 2003 enjoyed a splendid bull run with the best results since 1999. Would have been a shame to miss out due to lack of faith in your strategies.
But if you have a strategy that does well in all conditions (up, down or sideways markets), you should be able to have success no matter what. And be around when the markets to GREAT!
Zacks offers a premium tool to backtest your screens called the Research Wizard:. Create your own winning strategies. Or use the ones that weve created over the years that come loaded with the program. Learn more about the Research Wizard and Free Trial offer.