Let’s talk about Backtesting

[I_Anime]

Many traders overlook the importance of backtesting. Some folks here may already understand how backtesting works , for those that don’t I’m going to try to break it down to the most simplest way I can .

Backtesting is basically taking a trading strategy and applying its rules to historical market data to see how it would have performed. As a skilled trader in order to survive the market you have to come up with a strategy that suit you the most , and backtesting is what will help you figure that out , without wasting any valuable resources.

One of the common mistake most traders make , is using their live account to test their new strategy . There different strategies in the market we have price action, support and resistance, SMC and others. Those strategies are base on what some folks have observed in the market , so in order for you to know which suit you best , you will have to backtest it first and through that you can even come up with your personal strategy by modifying an existing one like price actions and the others.

Practical Steps to Backtest a Strategy

• Define your strategy
• Choose historical data
• Look for your setup
• Record every trade (very vital )
• Test enough trades
• Analyze the results ( win rate ,average win/loss, profit factor, Max. Drawdown, and overall expectancy).
• Forward test it ( in a demo account ) .

Website can use to backtest:

•Traderscasa (that’s the one I’m using recently).

https://youtu.be/yCWdahbeKk0?si=TST2AmWLEKcuH4kZ ( how to navigate the website)

You can also use trading view too.

[Floczy]

One of the common mistake most traders make , is using their live account to test their new strategy .

At some point it's not a mistake any more, it's a dopamine rush a trader has to deal with..

They have faith in what so ever strategy they feel they have successfully built and go to fund account right away to trade with the strategy. Some traders feel they don't have the time to go and backtesting, they feel it's a waste of time, and they accept the dopamine rush of funding account and trading with a strategy that has not been fully tested, highest they see one or 2 reoccurrences and they say it feel this will happen again, I feel this will work..

At some point I really feel every one should learn from their own experiences because even when I encourage some traders I know on how to paper trading or back testing and get better they still accept the dopamine rush of funding live account hoping they will make money, and they abandon the rest.

So for those that refuse to take advice let them loose some money and let them learn from their own experiences, as they said experience is the best teacher.. very real .

[EL MOHA]

So for those that refuse to take advice let them loose some money and let them learn from their own experiences, as they said experience is the best teacher.. very real .

Yes experience is the best Teacher they say but the problem is that most people actually who learn by losing money actually do not get back to trading again and the reason for this is the fact that most people actually lost their entire funding or capital to the market then or they are very discouraged to actually start coming back to trading again. This is usually a major problem that came from who they got influenced about trading from.

Backtesting is a tool which most traders over look now, in the past it is the most important thing for every trader because even if you wish to trade a new pair back testing is what you do to see if your strategy is better suited for that pair or not but right now most people are actually looking to make money easily that they don’t consider back testing

[nelson4lov]

you mentioned some important metrics to record during a backtest. I recently added two more metrics to record during my backtesting which are:

• MFE (Maximum Favorable Excursion)
• MAE (Maximum Adverse Excursion)

MFE records how much further price moved after you took profit. It helps to know if you are RR is low, high, or moderate enough to survive long term.

MAE records how far price moved against you before reversing back to a TP. This way, you will easily know with confidence where the stop-loss should be placed for your strategy.


I record both now and I have used them to refine my take-profit RR and stop loss placement since there are data backing them from every backtest I make.

[slaman29]

Don't have the knowledge of the current situation here but backtesting seemed extremely difficult with crypto (anyway for me using alts mainly to trade) because of the volatility and difficulty to really locate volumes (at the time). I believe even today most altcoins don't have good data on the exchanges.

Forex was a different animal, very reliable data 10/20 years, unlike crypto feeds, big differences.

My advice? Backtest with multiple exchanges, make sure massive slippage and liquidations all reflected in data. Those are what generally kill you in crypto.

[EarnOnVictor]

Many traders overlook the importance of backtesting. Some folks here may already understand how backtesting works , for those that don’t I’m going to try to break it down to the most simplest way I can .

I laughed when I read what you said about backtesting, particularly about the importance you are laying on it. Well, backtesting is not really bad, but my experience about it has been awkward.

Still, I wouldn't tell people not to backtest if they have the opportunity and the resources, but I tell you, you've only done the job the halfway by that. The real deal is forward-tesing; that is the only way the truth and the true nature of the system you are using can be revealed. Backtesting habours and hides a lot of truth, especially if the strategy you are backtesting is such that is dependent of the price movements.

[Frankolala]

One thing you should know is that demo account is different from real account. You can come up with a good strategy and make profit with demo account when back testing but the real fact is that, the real market wouldn't play out the same way like it did in demo account. It's a different market entirely, when you're using real account. One thing with back testing is that, past performance doesn't guarantee the future. Back testing or not, trading is highly risky and you will run at loss in the long run.

[_act_]

Record every trade (very vital )

Why should people record every trade when all the trades the trader is making is recorded on the exchange. You can go to the trading history on exchanges and you will see all the profits and losses, the coin you have the profit and loss and the date will all be there. I am not really into trading, but I know this part that I do not have to record every trade because it is recorded on the exchange.

[Mrbluntzy]

Website can use to backtest:

You can also use trading view too.

Are they free to use for the back testing?

Record every trade (very vital )

Why should people record every trade when all the trades the trader is making is recorded on the exchange. You can go to the trading history on exchanges and you will see all the profits and losses, the coin you have the profit and loss and the date will all be there. I am not really into trading, but I know this part that I do not have to record every trade because it is recorded on the exchange.

Yes, the exchange has the record of every trades that the trader took but the exchange record's can not remind you why you took the trade, the exchange can give you the record of what happened in that trade but your personal record is where you will write down why such movement happened. Personal records for each trade is where you note down every other information that the chart or exchange can not remind you of, such as the set up you used, whether you followed your strategy or not, whether the profit you made was just out of luck or out of skill, the mistake you made while on the trade and you definitely will also note down somethings that you have to repeat or avoid in your next trade.

[Donneski]

While backtesting will not be able to tell us what the market will do tomorrow,  it's definitely one of the better ways we can remove some guesswork from our preferred trading strategy. When you record the results of your backtesting, it helps you make informed decisions using your trading strategy because you get a much clear picture of how the strategy actually behaves before you can judge it from few trades. So yes, it's a very helpful trading hack for people who knows how the best use it.

[Rruchi man]

One of the common mistake most traders make , is using their live account to test their new strategy . There different strategies in the market we have price action, support and resistance, SMC and others. Those strategies are base on what some folks have observed in the market , so in order for you to know which suit you best , you will have to backtest it first and through that you can even come up with your personal strategy by modifying an existing one like price actions and the others.

It is not a proper way to trade, but I feel like if you have a very good understanding of risk management and can particularly ensure that the amount of money you are risking on a live account on trying a new strategy is a very little amount that you can afford to lose, then I think it's alright to try out your new strategy in your live account even without backtesting. But you should do so under a very controlled condition where, if the strategy fails, the loss remains very minimal.

For you to achieve that level of confidence in your risk management skill, you must have been trading for a while and be someone that has devoted your time to learning. Because if you're trying out a new strategy on a live account and you are sure that you have set the percentage you are willing to risk, you are not a new trader. New traders are still struggling with understanding risk management; if they try out new strategies on their live account, they could make huge, unforgettable losses.

[Asiska02]

Backtesting is a tool which most traders over look now, in the past it is the most important thing for every trader because even if you wish to trade a new pair back testing is what you do to see if your strategy is better suited for that pair or not but right now most people are actually looking to make money easily that they don’t consider back testing

No much value is giving to backtesting as it use to be in the past. Even new mentors that are taking trading classes don’t really emphasize on backtesting anymore and thus have caused a lot of traders to lose money while switching different strategy in search of the one they hope will work for them. The charts are forever there for you to learn from the trends of the market in order to stand an opportunity and be at advantage. Some pairs actually have a pattern that it keeps repeating that you can only learn through backtesting, and employing that will really help you in your trading position overall

[Alphakilo]

One thing you should know is that demo account is different from real account. You can come up with a good strategy and make profit with demo account when back testing but the real fact is that, the real market wouldn't play out the same way like it did in demo account. It's a different market entirely, when you're using real account. One thing with back testing is that, past performance doesn't guarantee the future. Back testing or not, trading is highly risky and you will run at loss in the long run.

There is always the surety of encountering losses in trading.
Infact, after back testing one must forward test second and must use real money that is already kept aside to try to see if this strategy that was back tested can be of impact in further live trading execution activities or it won't survive at all.
It takes a lot of practice and small regular losses to develop a tough skin to trade, remain in the trading game for longer, until one becomes a professional trader.

So after the backtesting has been successfully positive after forward testing with small funds and small position sizes, then one can definitely decide to use large funds in the live market with the strategy that has been tried out already.

[GbitG]

Record every trade (very vital )

Why should people record every trade when all the trades the trader is making is recorded on the exchange. You can go to the trading history on exchanges and you will see all the profits and losses, the coin you have the profit and loss and the date will all be there. I am not really into trading, but I know this part that I do not have to record every trade because it is recorded on the exchange.

I think OP means that you should journal like record the trade mean "Journal"..... Personally I write down every single trade even all of the rules for my trade and to be honest this is the only way to improve his trading capacity because through this you will be able to understand that how actually trading works and how I am doing it.....

However, I will suggest to everyone that made a journal of your trading and every weekend try to read the whole thing like where you did a mistakes or where you pass it accurately. Personally i used notebook for Journal like I took screenshots before tarde and also took a screenshots after the trade with all rules. It's work really good like a lot for things I learned from it like from my own mistakes.

[_act_]

I think OP means that you should journal like record the trade mean "Journal"..... Personally I write down every single trade even all of the rules for my trade and to be honest this is the only way to improve his trading capacity because through this you will be able to understand that how actually trading works and how I am doing it.....

Yes, I know that is what he posted about, but what I meant is just that I do not agree with him so far I have it is automatically written on the trading history of the exchange, but which I will not have to also go through because I can easily know if my strategy is working and maybe to further with the strategy or not.

[Alvin_talk]

Just as most users have said, back testing don't guarantee a future profits. It's the same way in every field. You practice simulated reality to have a clue of  how effective a product or idea will look like with already known phenomenon in reality. That is what pilots do before they start flying, even soldiers play war games before engaging in war, but until a product is battle tested nothing can be assured. That is because it cannot produce every conditions all the real world.

You just have to be as dynamic and free flowing as possible to survive in the market, because nothing is certain. Historical study will not save you when you encounter sudden volatility and spreads that have never occurred in the past in live market condition. No one is saying back testing is not important but it has its limitations.

[ObeyKnock]

• Define your strategy
• Choose historical data
• Look for your setup
• Record every trade (very vital )
• Test enough trades
• Analyze the results ( win rate ,average win/loss, profit factor, Max. Drawdown, and overall expectancy).
• Forward test it ( in a demo account ) .

To add to what was mentioned above but not specifically stated: if the equity curve is suspiciously smooth and goes up steeply, it's more than likely that it's curve-fitted and the strategy is NOT that awesome.

As mentioned above, one should not optimize a strategy based on 100% of the data. A rule of thumb is to use 70% of the data for in-sample optimization and use the other 30% as the out-of-sample data. Do NOT TOUCH the other 30% until you are done building your strategy and have set your rules in stone. Then, and only then, backtest that strategy once on the other 30% of data and see how it performs.

The discrepancy between the IS and OOS results will give an indication of how much of your backtested edge is due to actual edge and how much of it is due to noise.
Take it up a notch and perform a walk-forward analysis where you march the IS/OOS timeframes forward and optimize each time. This will indicate whether you have a strategy that makes money only for that particular set of circumstances/market conditions or whether it has any sort of staying power. Walk-forward is pretty much the gold standard for backtesting.

[Dr.Bitcoin_Strange]

Since I started trading, I have not done this backtesting that you just describe, I feel it's a waste of time to do so, instead why not just go straight to trading any new strategy you got on the demo account, I am not saying that backtesting is irrelevant, perhaps it could be useful for some newbies but from my perspective, one can still keep practicing a newly discovered strategy on the demo account without losing anything. So, instead of backtesting without taking a trade, just go straight to practicing the strategy on the demo account and experience how the trade feel, if you blow the demo balance you can always refill it and continue, that was how I learned trading and it's also my own style of backtesting.

[Plutomanian]

Many traders overlook the importance of backtesting. Some folks here may already understand how backtesting works , for those that don’t I’m going to try to break it down to the most simplest way I can .

Backtesting is basically taking a trading strategy and applying its rules to historical market data to see how it would have performed. As a skilled trader in order to survive the market you have to come up with a strategy that suit you the most , and backtesting is what will help you figure that out , without wasting any valuable resources.

One of the common mistake most traders make , is using their live account to test their new strategy . There different strategies in the market we have price action, support and resistance, SMC and others. Those strategies are base on what some folks have observed in the market , so in order for you to know which suit you best , you will have to backtest it first and through that you can even come up with your personal strategy by modifying an existing one like price actions and the others.

Practical Steps to Backtest a Strategy

• Define your strategy
• Choose historical data
• Look for your setup
• Record every trade (very vital )
• Test enough trades
• Analyze the results ( win rate ,average win/loss, profit factor, Max. Drawdown, and overall expectancy).
• Forward test it ( in a demo account ) .

Website can use to backtest:

•Traderscasa (that’s the one I’m using recently).

https://youtu.be/yCWdahbeKk0?si=TST2AmWLEKcuH4kZ ( how to navigate the website)

You can also use trading view too.

Well future backtesting is not guaranteed following the usual change in market condition, we know the market is not friendly to anyone and we traders try our ultimate best to ensure we're dealing with every moves to become profitable in the market. Backtesting is crucial for trades and also for new beginners, professional traders not excluded. We start making analysis about backtesting to see how it would have been formed in previous trades, before actually investing hugh stipends on them.

We should be very careful and know exact what we want in the market, it's not a safe space for anyone of us, I'd politely urge anyone trading should be careful and always in their free time do backtesting note it's very risky during trading live because the market have a way of taking our open trade positions out.

[Gozie51]

• Forward test it ( in a demo account ) .

You are correct with your analysis about backtesting but we also know that trading is a highly emotional stuff. I believe apart from demo testing, I think a little live trading too can be adopted to taste the emotion because you need a strong conviction on your strategy most times and to know exactly how you can manage the strategy, the loss and profit, you need a live experience. If you watch in demo trading, traders make alot of profit but they are not able to replicate it in live trading, why? The reason is because of emotional trauma when you see your losses, you can immediately close that trade and soon it starts going your direction while you had already taken losses out of the market.

It is risk to go live but I still believe it is the best to have a live experience of your backtesting strategy. However, you can reduce your risk appetite and lot size.