Once you learn a trading strategy, it may seem to work well for a while. But as time goes by, you may encounter backlashes and lose trades. You may have experienced this many times. It will push you to give up on that strategy and formulate a new one.
This cycle goes forever until you latch on to the right strategy. Therefore to save yourself from this vicious cycle and take a calculated risk on formulating the right trading strategy, you have to know what backtesting is.
Backtesting, along with backtesting software, is the main component of an effective trading system development. Simply put, backtesting is the process of applying the trading strategies to historical data. The results offer statistics that will help you measure the effectiveness of the strategy.
The basic theory behind backtesting is that any strategy that worked well in the past will likely work well in the future. There are certain patterns that may repeat again and with backtesting you can learn how to decipher those patterns and ride on the trends.
Implementing Backtesting Using a Backtesting Software
Backtesting is a trading strategy where you test the trading hypothesis/strategy on the historical data instead and apply it to the future. You can develop and test various strategies and deploy the right one after analyzing the results.
The primary purpose of backtesting is to learn ways to limit trading risks and develop profitable strategies. When it comes to implementing backtesting automated backtesting software can come in handy to formulate and optimize strategies under a controlled setting. It offers high-end functionalities like automatic position sizing, optimization, customizable backtesting settings, and a detailed results report. With backtesting software by your side, you do not have to divest a lot of time and resources on manual testing, and it acts as a platform for coming up with the right strategies that work in a quick span of time.
Effective Tips For Backtesting Strategies
Here are some tips you can follow before you start backtesting your strategies:
Get Your Hand On The Right Tools
In the growing market, many new tools and software are turning up around the globe. But choosing the right one might be an arduous process. Before you enter the hunt, come up with your ultimate goal and look up what resources you already have in hand to attain it.
According to your skill level, budget and need, scour through the market and choose the right tool. One of the essential tools, the backtesting software is one such example, which lets you check the effectiveness of trading strategy with detailed reports.
Some of the best backtesting tools are software for backtesting, marketing data, spreadsheets, charting software, and more.
Have Measurable Goals & Specific Ideas
To run a test and get the right statistics report, you must develop a measurable idea instead of vague details. Only when your ideas are specific and measurable, the testers will determine if the trading strategy is right or not.
Before you start with the testing list out all the parameters that you want to evaluate. Specific backtesting software lets you customize parameters ranging from commission costs to time period. Detailed parameters will give you the right results, which will, in turn, help maximize profit.
Follow KISS (Keep It Simple, Stupid)
With heaps of data available, it can be challenging to find the right data and statistics if you fail to focus on accuracy. Adding the emotional factors to the mix, there are many chances for you to take up irrational ideas and justifications during trading.
All you have to do is, keep your ideas, strategies, and goals simple and straightforward. Unclear strategies will only drive you away from reasonable goals and profits. It can even lead to a downfall sometimes. So keep your ideas simple to get better results.
Identify Indicators & Metrics Beforehand
Using the right indicators and metrics while doing backtesting can improve the accuracy of the results. But it should not be done after the test begins, as it can create issues and give out messed up results.
Spend some time and prepare all the indicators and metrics beforehand. It will help avoid bias during the test and will make the process justifiable.
As backtesting is one of the critical aspects of developing any trading system, it can make or break your strategies. If developed, interpreted, and integrated correctly, it can help you improve and optimize your strategies, find flaws, and gain confidence in the strategy before going to the live market. It’s worth investing in the right backtesting software to come up with the most lucrative strategies.