Backtesting starter guide


trading-simulator | TradingView backtesting


I. Introduction

There is one case where past performance is sure indication of future results. Trading strategies with negative backtesting outcome are guaranteed to repeat! Backtesting is a crucial component of any successful trading strategy, and it is important to understand how to use backtesting tools effectively. This tutorial will provide an overview of a backtesting tool, explain the importance of backtesting, and show you how to set up your backtesting environment.

What is Backtesting

Backtesting is the process of evaluating a trading strategy by testing it on historical market data. By using historical data, traders can see how their strategy would have performed in the past and make adjustments to improve their results.

Importance of Backtesting

Backtesting is essential for traders who want to avoid making costly mistakes and improve their chances of success. It allows traders to test their strategies in a controlled environment, identify areas for improvement, and fine-tune their approach. By thoroughly testing their strategies before entering the market, traders can make more informed decisions and trade with greater confidence.

Why forexthrive Backtesting Tool

Backtesting is a crucial part of any trading strategy development. It allows traders to test their ideas and see how they would have performed in the past.

Our backtesting tool is designed to make the process of backtesting easier and more efficient. It can store many backtesting sessions, which we call "backtesting games". Each game instance is fully customizable, allowing traders to set custom values for the testing time-span, margin account requirements, initial equity, trading instruments, brokerage fees and many other parameters.

One of the key features of our backtesting tool is the ability to customize the values for all trading instruments. Traders can set separate leverage, commission, spread, and broker-admin fees for each instrument. This level of customization allows traders to get a realistic picture of how their strategies would have performed under specific market conditions.

In addition to customizable values for each instrument, each game instance also has critical levels such as the maximum draw-down, minimum account margin, and max margin level. This information is critical in determining the risk tolerance and profitability of a trading strategy.

Our trading simulator also has built-in game constraints to ensure that traders are using strategies that are aligned with their risk tolerance and investment goals. This helps traders avoid over-leveraging their positions or taking on too much risk.

In conclusion, forexthrive backtesting app is a comprehensive tool that makes it easy for traders to test their strategies and get a clear picture of how they would have performed in the past. With customizable values for each instrument, critical levels, and game constraints, traders can be confident in the results they get from their trading strategy back tests.

II. Setting Up the environment

In order to get started you need to set up your backtesting environment. This includes creating an account, adding and configuring new game, optionally setting some custom trading parameters.

Creating an Account

The first step in setting up your backtesting environment is to create a account. This will give you access to the app including historical market data that you need to run your tests. Your first sign-in will create the account automatically.

Trading configs Essentials

Once logged in to your account, you can set some basic configs that will make your back-testing easier and more accurate. This includes setting up custom parameters like default (Take Profit/ Stop Loss), enable or disable trade alerts, adding indicators or drawings to the chart, creating configurations that match your trading account as leverage, trading fees etc..

Setting Custom Parameters

The tool allows you to set a variety of custom parameters, such as the starting and ending dates for your session, the currency pairs that you want to trade, commission, margin or funding fees. For some trading strategies the most important parameter is the transaction cost which is the price that we pay to open/close or maintain our trades. Trading Fees can have a significant impact, profits easily could got eaten by fees and traders often focus a lot more on position entry/exits or fancy indicators. Trading instruments refer to the different types of markets and fees could become hard to understand but surely impact trading strategy outcome therefore back testing results. Traders often set higher fees for their backtesting activity to offset hidden risk, avoid false positives and get more accurate results.

III. Understanding Market Data

The type and quality of historical market data can significantly impact tested strategy performance. Our algorithm is built to replay one-minute OHLC (open, high, low, close) bars. While some trading strategies require tick data, which provides the smallest possible price movements with details of each bid and ask. This is often the case with HFT trading strategies (High-frequency trading), which are mostly algorithmic and employed by the largest players. However, some traders prefer higher frequency manual trading on smaller time frames like 15s or 1s, a trading style that can be extremely stressful, difficult and expensive (more trades, more fees). Since our main goal is to help retail traders, and as we all know, retail traders often face the worst trading conditions, such as slower order execution, wider spreads, slippage, and commissions, plenty of reasons to put tick-data driven strategies in to the "STAY AWAY" category. Therefore, we choose one-minute bars as "Golden Mean" the perfect balance between quality and quantity.

Your first Trading Strategy

Now that you have set up your testing environment and understand the market data, it's time to run your first backtesting game session. Ready to move on and proceed with your trading strategy development