What is backtesting?
Backtesting is a method of analyzing the performance of a trading strategy over a period of time in the past. Backtesting a trading strategy helps you evaluate its behavior in post-factum market scenarios, and determine where it stands out and where it fails. It’s an essential tool to help you validate a trading model in hindsight. A backtest, in simple terms, is going back in time and checking how your trading strategy would have performed through ranging markets, optimism periods and depression phases of the markets, it is witnessing a strategy performance at the height of the global financial crisis or at the start of the COVID pandemic.
Backtesting aims to help generate results to assess risk and profitability without risking actual capital. Think of it as swimming with a life jacket – you’re in contact with the water, but you can’t drown. Backtesting is to traders what training is to professional athletes. They spend hours honing their technique before going out to compete. Training allows them to improve and gain in confidence similarly to backtesting which confirms them strategy at hand on the basis of numerous tests and data analysis.
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With meticulous attention to detail and a commitment to perfecting strategies, we generate steady returns that relieve you from the stress of looking at your positions and thus enrich the lives of those who inhabit them.
There are many different software packages we can use for backtesting.Options include Microsoft Excel, ready-made third-party platforms or creating software from scratch.The major algorithm trading companies program their backtesting software in a variety of computer languages. These may include Tradingview, Python, C++, C#
To perform backtesting correctly, you need historical data.The program takes the specifications of your strategy and applies them to a particular market period in the past to show you how it would have behaved back then.
Based on the results of the backtest, the trader or analyst will decide whether the strategy needs fine-tuning, or whether it’s good enough to be applied as it is.
Our backtests, as shown in the videos, are deployed through tradingview.com which provides historical data and strategy logics written in pinescript v5. We diligently ensure by reviewing each line in our code for any lookahead biases which mislead many traders. Most our strategies are built with reentries – what many would call pyramiding or DCA, plus commission fees of 0.045% on each entry and exit.
The idea of backtesting is based on the theory that financial markets work in cycles.If something has been viable in the past, many traders assume it will remain relevant in the future. And vice versa – if it failed in the past, it probably won’t succeed in the future either.
The two main pillars of a trading or investment strategy are risk and return and their relationship.Backtesting helps you quantify these two factors to show the overall profitability of your strategy and your appetite for risk.
You need to backtest your trading strategy to find out how it will perform in real market scenarios.Backtesting allows you to simulate your trading idea using historical data and put its risk management mechanisms to the test.
Backtesting a trading strategy can help you find its weak points, test its points of friction and highlight the parts requiring further fine-tuning without deploying your hard earned money. By doing all this, you can iron out any problems, strengthen your risk management tools and ensure that your trading strategy is sufficiently robust.
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