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Backtesting starter
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. This methodology has been used by the biggest financial firms and institutions for many years.
Typically, 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 tested across various 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.
In simple terms, backtesting is similar to demo trading but with the ability to go back in time and simulate trades while monitoring profit/loss and other metrics. It is a faster and more intelligent version of simulated trading (paper trading) with the added feature of historical data analysis.
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. It becomes the perfect storm, and according to statistics, this storm typically ends within three months, as most accounts end up getting liquidated. 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. So, if you’re tired of wasting your valuable time on demo trading backtesting is the faster, smarter more efficient alternative.
But let's be objective backtesting is not magical money making machine, but for sure can improve your overall trading results .
Some active discussions by traders:
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.
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.
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.
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.
Software and Tools: There are various software platforms and tools available for conducting backtesting, and discussions cover their features, capabilities, and user experiences.
I. Introduction
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.