What is back testing in trading and how we do it ?

[gurujangid]

What is back testing in trading and how we do it ?

[Oshosondy]

Assuming you have a trading plan already, which can be based on your trading period, net profit target, stop loss target, intended entry price and and many like that, depending on you as a trader as we all as a trader may have more plans and strategies which we are using to trade. After having your trading plan and strategy, you can go through historical data and other things that can make you see how your trading plan would be more successful or not, if analysing your plan and strategy to go successful, then making you to have more confidence to follow your trading plan and strategy to trade or open a position.

[mk4]

In summary: applying your trade ideas/strategies/indicators to historical charts and see how accurate your indicator is in determining the next market move.

How do you do it? By either doing it manually(very time consuming) or using code.

[un_rank]

Imagine you have a trading strategy in mind and you want to know how it would work. Instead of demo trading with it in a hypothetical trade situation or risking money with the untested strategy you check how well the strategy would do if it was done at some time in the past.

You simply apply the strategy to some historical trade outcome to check if you would have made profit or loss. This is a form of demo trading but you are applying it to past trade situation which gives more accuracy.

Note that there is no guarantee that there would be a correlation between past events and future outcome.

- Jay -

[G_Besar]

What is back testing in trading and how we do it ?

During this time I rarely trade because I still prefer to keep the assets that I already have. But if you ask something like that here, I can only give an answer that is already available on the Investopedia site, and I think what has been explained on the site is sufficient for you to understand it in general.

Backtesting is the general method for seeing how well a strategy or model would have done ex-post. Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data. If backtesting works, traders and analysts may have the confidence to employ it going forward.

[EarnOnVictor]

What is back testing in trading and how we do it ?

Backtesting is the review of past events with your current trading strategies and plans to ascertain if they could truly work or not. Traders backtest with their indicators and other devised trading approaches directly from the trading platform. This could be done manually or automatically depending on the provision on the trading platform. For this, you would have to learn from your broker's/exchange's platform what they make available for you.

#Warning: Backtesting doesn't often work for indicators, they will trick you, forwardtesting is better in this regard. But for strategies like Price action, Trendline diagram, Fibonacci retracement and breakout and Elliot wave theory, it will work, but they have to be done manually to be accurate.

[dzungmobile]

Back testing is one of two testing types with Pine Script on Trading View. You can code your Pine script and use it to back test or Forward test on Trading View.

Back testing will test your script efficiency with past market movements but remember many things are different between past events and future events which can have different impacts on the market.

All scrips will have times when they can not work well with market big movements. So you should plan to stop your trading bot when market goes to unclear phase. After market decides its next trend, you can turn on your trading bot again.

https://www.tradingview.com/support/solutions/43000562362-what-are-strategies-backtesting-and-forward-testing/

[Mpamaegbu]

#Warning: Backtesting doesn't often work for indicators, they will trick you, forwardtesting is better in this regard. But for strategies like Price action, Trendline diagram, Fibonacci retracement and breakout and Elliot wave theory, it will work, but they have to be done manually to be accurate.

Perhaps you should've added that it doesn't work with "lagging" indicators or indicators that repaint and not that backtesting doesn't actually work at all. How does one guage the present and future if one doesn't review the past? It's not possible. This is where backtesting comes in. For me, I started with those MAs, Fibs, MACD, until I discovered they lag. They reflect price after price has moved from that point, and not before it happens. Now I rely more on leading indicators of S&R, Trendlines and Pivots. They lead price action. In conclusion, anyone who wants to take trading seriously should backrest their strategies before hand.

[EarnOnVictor]

#Warning: Backtesting doesn't often work for indicators, they will trick you, forwardtesting is better in this regard. But for strategies like Price action, Trendline diagram, Fibonacci retracement and breakout and Elliot wave theory, it will work, but they have to be done manually to be accurate.

Perhaps you should've added that it doesn't work with "lagging" indicators or indicators that repaint and not that backtesting doesn't actually work at all. How does one guage the present and future if one doesn't review the past? It's not possible. This is where backtesting comes in. For me, I started with those MAs, Fibs, MACD, until I discovered they lag. They reflect price after price has moved from that point, and not before it happens. Now I rely more on leading indicators of S&R, Trendlines and Pivots. They lead price action. In conclusion, anyone who wants to take trading seriously should backrest their strategies before hand.

It baffled me when those that need correction like you would be correcting others that need to lecture them. If you must know, I major in trading and I've taught and mentored many over the years. I even have my books about trading, so I don't blab and am not like those that are just trading.

To make it worse, you supported the most confusing "leading indicators" that only dance quickly to the change in price, how naive are you? Also, as a matter of correction, Trendline and Pivot points are not indicators, they are support and resistance levels that translate into strategies. They can only be indicators if you code them to be one, so you need to learn more about trading.

Conclusively, you must know, whether it's a leading or lagging or repainting indicator, they are bad for backtesting, all indicators would fail you because they move relative to the market price. However, my supported strategies (Price action, Trendline, Fibo and Elliot wave) which you wrongly debunked don't. You can depend on them for your historical studies and backtesting. This, I've done many times, so it's practical to me and strange that anyone could state otherwise.

[Rexlus]

Base on my little view on this.
Backtesting is the common way for perceiving how well a plan or model would have done.
Backtesting assesses the being or energy of a trading plan or cost or estimated model by finding how it would have fagged.
Backtest in some cases allows dealer to test trading plans without the demand to risk their capital

[Faisal2202]

What is back testing in trading and how we do it ?

Backtesting is like going back in the past and testing the market. For example, you want to do trading in BTC and you do not want to follow anyone's signals or advice. You want to make your own strategy. What does strategy mean? It means you want to understand the candle's behavior of BTC by going in time via setting a timeframe let's say a time frame starts from 1st January of 2023.

Then, you will try to understand the market behavior from 1st January of 2023, so that you could understand the overall sentiments of the BTC pair that you could use the same strategy which you used in the backtesting to yield more profits. But that's not going to happen every time because the market is so unpredictable and by analyzing past data you can only predict the future market from many possibilities.

You asked how can I do it. There are many platforms in the market, such as Trading View , GoCharting, Ninjatrading, and Meta Trader. You can use the first ones for free but with limited resources.

You can know more about BackTesting from the following YouTube Links.
https://youtu.be/SoWs-yklICM
https://youtu.be/OwvElpGjLKI

[Mpamaegbu]

~snipped~

It baffled me when those that need correction like you would be correcting others that need to lecture them. If you must know, I major in trading and I've taught and mentored many over the years. I even have my books about trading, so I don't blab and am not like those that are just trading.

Wow! How you quickly went on the offence is what beats me here. My dear, we aren't in competition. Do whatever that pleases you. I only stated that you omitted a crucial part of trading in what you listed. I don't know why that should spike your adrenaline level.

To make it worse, you supported the most confusing "leading indicators" that only dance quickly to the change in price, how naive are you? Also, as a matter of correction, Trendline and Pivot points are not indicators, they are support and resistance levels that translate into strategies. They can only be indicators if you code them to be one, so you need to learn more about trading.

Oh really? They aren't indicators? You miss the point of what indicators are then. If you haven't heard the term "leading indicators" before now, you should've checked it out before laying yourself bare in public. Again, you said those set of indicators dance to the change in price? That's ludicrous to say the least. If you actually understood what they're you would know how false your statement is. Lastly, every trading plan and strategy can be coded.

This, I've done many times, so it's practical to me and strange that anyone could state otherwise.

Well, to each what works for them.

[Assface16678]

What is back testing in trading and how we do it ?

back testing in trading is to go through historic data between 5 to 10 years but its less than this if you're on a 1 minute chart and to see whether your trading strategy is profitable over time whether it has a proven edge in the markets over time. It also applies predictive model to determine it's accuracy and this back testing can measure your profit and loss