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Backtesting

forex-simulator | forexthrive backtesting engine with TradingView charts

Backtesting is a widely discussed topic in the field of finance, particularly in the context of trading strategies and investment analysis. It involves evaluating trading strategies using historical data and is a crucial tool for traders and investors to assess the viability and performance of their strategies. Back-testing can be performed manually or using specialized software tools.

• Manual Backtesting: Employ a spreadsheet to document the trades and manually apply the trading strategy to historical price data, recording trade entries, exits, and profits or losses. This method is extremely time-consuming, but it is free and provides some insight into the mechanics of the strategy.

• Trading Platform Backtesting: Some trading platforms (brokers) offer built-in backtesting functionality in their platforms and tools for simulating trades, tracking performance metrics, and adjusting parameters. This method is convenient and efficient for traders, but most of the tools require some level of programing skills

• Independent Backtesting Software: Specialized backtesting software offers a wider range of features and customization options compared to trading platform backtesting. These tools often provide advanced charting capabilities, statistical analysis, and the ability to import various data sources.

• Cloud-based Backtesting Platforms: Cloud-based backtesting platforms provide access to powerful backtesting capabilities without the need for installation or maintenance. These platforms offer scalability and flexibility for traders with large datasets or complex strategies.

Within the realm of finance, a backtest is coded by a programmer whose job is to create a simulation of a trading strategy developed by a team of analysts. The strategy, also known as the model, is subjected to testing across diverse market conditions by running it through different historical data sets. Backtesting serves as a risk modeling mechanism used to evaluate market exposure and statistical probabilities. This methodology has been used by the biggest financial firms and institutions for many years.

Unfortunately, retail trading platforms often prioritize demo trading features, offering simulated trading environments in "real-time" to help clients become familiar with the platform, rather than emphasizing the risks associated with trading. This approach reduces the availability of robust backtesting capabilities and comprehensive historical data for users to analyze and refine their strategies. When combined with poorly regulated jurisdictions, this situation can lead to significant issues. Retail traders often find themselves in a pure conflict of interest when brokers are motivated to take the other side of the trade.

Demo trading (forward-testing) plays an important role in the process of trading strategy development, but traders must ensure that it is reflective of real-world trading conditions. This means simulating the impact of slippage, wider spreads, commissions, markup fees and emotional factors that can significantly impact trading performance.

While the percentage of new traders who practice demo trading for at least three months remains unclear, we can only speculate about the trading conditions on demo trading accounts. Are they truly reflective of real trading, or do slippage and wider spreads come into play later? Additionally, we can only ponder the extent to which those influenced by the industry and its affiliates are capable of persuading new and unprepared traders. On the other hand, it only takes less than an hour to back-test a strategy on three months of historical data. In this regard, we consider it our duty to provide backtesting for free with access to at least three months of historical data for anyone seeking a faster means of validating their own or someone else's readiness to risk or delegate real capital.

Time is considered the most valuable resource because it is limited and irreversible. Therefore, if you're tired of wasting your precious time on demo trading, stay calm and embark on backtesting for rapid, smarter, and more efficient evaluation of your trading strategy.

But let's be objective , backtesting is not a magical money-making machine. It's a tool that provides insights and safety to those willing to put in the effort and analyze their trading endeavors.

Some active discussions by traders:

1. Accuracy and Reliability: The accuracy and reliability of backtesting results are frequently debated. Issues such as data quality, survivorship-bias, lookahead bias, and overfitting are discussed in relation to the potential impact on the validity of backtesting outcomes.

2. Limitations and Caveats: The limitations of backtesting are a recurring topic. Discussions often touch upon the assumptions made during the process, the inability to predict future market conditions accurately, and the importance of incorporating other forms of analysis alongside backtesting.

3. Methodology: Discussions often focus on different approaches to backtesting, including the selection of historical data, the choice of performance metrics, the handling of transaction costs and slippage, and the implementation of realistic trading rules.

4. Strategy Development: Backtesting is an essential tool for strategy development, and discussions revolve around the process of generating and refining trading strategies using historical data. Traders and researchers share insights into developing robust, profitable, and risk-managed strategies through backtesting iterations.

5. Software and Tools: There are various software platforms and tools available for conducting backtesting, and discussions cover their features, capabilities, and user experiences.