Backtesting is an essential component of creating a profitable trading strategy. With the help of backtesting, you can check the performance of the system according to the history of the previous trading. Backtesting is the re-creation of the trading process based on the rules that the speculator observed in the past while trading.
Data that can be obtained from backtesting
With the help of backtesting software, a trader learns the following information:
- The ratio between profitable and losing trades.
- What are the total profit and total loss?
- What time period suits him best for trading.
- What assets are best to trade.
- What was the volatility of the account (jumps in profits and losses)?
- The size of the average profit and average loss.
- How long, on average, positions were held.
- The percentage of profitability of the trading system for the year.
- Profitability calculated by taking into account risk volatility.
Top Backtesting Software Providers
- MetaTrader
- Forex Tester
- Trading View
- Ninja Trader Profit Finder
- Soft4X
- TradeStation
- Microsoft Excel
Key highlights of the backtest
Highlights of backtesting The most commonly used software for backtesting is dual-screen software. On one, the trader sets the analysis parameters, and on the other, he sees the results. Before starting the test, you must enter the most accurate and correct parameters, including:
- commission amount;
- volume of transactions;
- point value;
- margin size;
- interest rates;
- introduce rules for setting a trailing stop and restrictive orders, and so on.
For the test results to be most correct, it is necessary to enter realistic parameters. Over-optimization often occurs during the backtest execution, it appears when the parameters of the trading strategy are set up with great care and adjusted to the given history. In this case, the trading system will give excellent results in the past but will cause losses in the future. To prevent this from happening, it is recommended to use a simple trading system, which is approximately equally effective for all trader’s trading tools.
Testing should be carried out on a large time interval, which will cover different market trends and different trading conditions. Special attention should also be paid to other points. For example, if the backtest was conducted in the technology stock market, then most likely, the strategy will falter in the stock markets of other sectors.
An assessment of the volatility of trading results is also necessary. Especially if you are trading on margin accounts that are subject to margin calls. Try to choose a strategy during which the capital volatility is low.
It is essential to determine the average risk capital and reduce it if it is too high. Large risk capital leads to large profits, but losses will also be greater. Evaluate both the statistics of average profits and losses and the percentage of annual profitability. Studying these indicators will allow you to significantly reduce the risks