Incubation

When you have backtested in sample data and also backtested out-of-sample data, you need to go to the last step before you take your strategy to live trading: the incubation period.

The incubation period is extremely important. The incubation period is when you trade your strategy in a live DEMO account.

We recommend you have a demo account. For example, Interactive Brokers automatically makes a demo account available to you on-demand (if you have a real account).

In this demo account, we recommend you paper trade on real data all your potential strategies for several months before you commit your hard-earned capital.

Incubation has two advantages:

First, you get to see how the strategy performs in real-time. Doing a backtest compresses time, and you don’t get any “feel” for how it is to trade the actual strategy.

Secondly, the incubation period acts as a second safety valve (the out-of-sample backtest being the first). In our own trading, we filter out a lot of bad strategies this way and this has saved us a lot of money over the years.

Incubation works as a safety valve. It takes little time, but it is well worth it!