Backtesting trading strategies
Backtesting is an essential component for creating a profitable trading strategy. By backtesting, you can check the system performance from the history of previous trades. Backtesting is the re-creation of the trading process on the basis of rules that the speculator observed in the past during trading.
Backtest provides the trader with statistics, through which you can evaluate the profitability of his trade. Analyzing the obtained data, the speculator can improve his trading system, identify its shortcomings and take corrective measures. The main idea behind backtesting: if the trading system has previously produced excellent results, then it will be effective in the future.
Data that can be obtained from backtesting
With the help of backtest, the trader learns the following information:
1. The ratio between profitable and unprofitable transactions.
2. What is the total profit and total loss.
3. What time period is most suitable for him for trading.
4. What assets he is best to trade.
5. What was the volatility of the account (jumps in profits and losses).
6. The size of the average profit and average loss.
7. How long the positions were held on average.
8. Percentage of profitability of the trading system for the year.
9. Profitability, calculated taking into account the variability of risks.
The most important moments of backtesting
Most often for software, software with two screens is used. On one trader adjusts the analysis parameters, and on the other sees the results. Before the test begins, you must enter the most accurate and correct parameters, including:
In order for the test results to be the most correct, you must enter realistic parameters. During backtest execution, re-optimization often occurs, it appears when the parameters of the trading strategy are adjusted with high care, adjusted to the history data. In this case, the trading system will give excellent results in the past, but will cause losses in the future. To avoid this, it is recommended to use a simple trading system, which is approximately equally effective for all trading tools of the trader.
Testing should be conducted over a large time interval, which will cover different market trends and different terms of trade. Pay special attention to other points. For example, if a backtest was held in the technology market, then most likely the strategy will fail in the equity markets of other sectors.
An estimation of the volatility of the results of trade is also necessary. Especially if you are trading on marginal accounts, subject to margin calls. Try to choose a strategy during which the volatility of capital is low.
It is important to determine the average risk capital and reduce it if it is too large. Large risk capital leads to large profits, but the losses will be greater. Estimate both the statistics of average profits and losses and the percentage of annual returns. The study of these indicators will allow you to significantly reduce the risks
Backtesting and has many advantages, but it is not the most accurate method of checking the operation of the trading system. The market is too variable to accommodate all factors. Therefore, often trading systems that have given excellent results in the past, in the future, bring only losses. In addition, the psychological aspect has a significant impact on trade.