Trading system backtesting is the process of going back in time to analyze the present performance of your trading strategy using historical data. By doing this, you’ll be able to simulate how things would have played out in the past. In addition, you'll be able to pinpoint where your strategy shines and where it's lacking. Good backtesting outcomes usually result in good results even in the present, making it essential for traders.
At CloudQuant, you can backtest virtually any strategy using our free or premium tools. Our platform delivers consistent results between backtests and live trading by including real-life market structures and trading costs.
How to Backtest a Trading Strategy
The principles of stock backtesting are essentially similar regardless of the platform used:
You need to input the backtesting algorithm with historical data. Then, indicate a time period for your training set. You’ll also require another data set for a different period. Testing your strategy for various periods verifies its reliability and prevents randomness.
Set limits based on how your model is designed. These can include starting capital, commission, percentage of capital at risk, and don't forget a benchmark. Additionally, factor in the exact parameters of your trading strategy. They can include take profit level, type of preferred positions, and when to close a position.
Run your backtest for all the datasets. The details provided in steps 1 and 3 will be vita lin simulating trades over the given time frame. Once you're through with the backtest, it's advisable to rerun it several times over another data set. This is important in eliminating the random factor and any possible bias.
You’ll discover that a lot of backtesting software also come with strategy optimizations features. This means that the computer can show you the best information combination for your strategy. It could also give you suggestions on how to improve your model.
What Backtesting Tells You
Basically, backtesting trading strategies offer answers to the following questions:
- What’s the optimal risk for each trade?
- Have you properly adjusted your entry and exit triggers?
- Which markets favor your strategy the most?
- Does your trading setup address your goals and needs?
In today’s markets, data is king. For this reason, it's in your best interest to backtest strategies for trading using predictive analytics, leading indicators, and historical data. With the results, you'll be able to fine-tune your strategy to increase your chances of a successful outcome.
On the other hand, without leveraging actual market data, it will be next to impossible, if not impossible, to obtain an accurate depiction of the future performance of your trading strategy. You wouldn't also be able to know if your strategy can work in real market conditions.
In a nutshell, when you backtest your trading strategy, you'll learn how it would have performed back in time. If the results were poor, the probability it'll be successful now is slim. But if it excelled in the past, it's more likely to deliver desired outcomes in the future. This information provides actionable insights, giving you a competitive edge.
At CloudQuant, our secure backtesting environment enables you to perform granular and more robust trading system backtesting. This provides valuable insights into how your trading strategy might perform at different times and in the future. Schedule a demo: https://meetings.hubspot.com/tayloe/cq-meeting.