Backtesting: The key to creating successful trading strategies
Updated: Dec 14, 2020
For a trader, backtesting is one of the most important steps in developing a trading strategy.
It helps in identifying technical as well as theoretical flaws in the system and mostly gives the confidence to use the strategy in the live market.
The reasoning behind backtesting is that if your strategy has worked in the past then it will work in the future as well. Furthermore, with some alterations in the parameters, it may work even better.
So once you have backtested the strategy, you will know exactly what gives profits & where losses occur.
Rules to keep in mind while backtesting trading strategies:
Time Frame: Keeping in mind broad market trends, a strategy tested for the year 2000, would obviously be of no use in 2020.
Sector: A strategy created for the pharmaceutical sector would definitely not work in the entertainment sector or industrial sector.
Volatility: Affects the cost and ease of transactions.
Bars: When developing a trading system, the number of bars play a crucial role. Increasing the average of bars will result in better outputs
Exposure: This is usually directly proportional to profits. The balance should be maintained in order to limit loss.
Optimizations: Stop Loss, lot size, margins, sizing, exits rules can be optimized to yield better profits.
Profit & Loss stats: The ratio between wins: losses will determine optimal positions. Positions can be made larger or smaller to adjust the desired outcome.
Paper Trading: Deploy the backtested strategy in the virtual trading mode so see how it is performing in the current market scenario.
There are many software & tools available in the market for backtesting. Amibroker is one such powerful tool.
If you require help in developing a customized code for backtesting & optimization, Arque.Tech offers this service. Email: email@example.com