Backtesting involves applying a strategy or predictive model to historical data to determine its accuracy. It allows traders to test trading strategies without the need to risk capital. Common backtesting measures include net profit/loss, return, risk-adjusted return, market exposure, and volatility.
The benefits of backtesting
- You can test various, even very different trading strategies very quickly and without risking any capital
- The test, optimize, re-test cycle of backtesting enables continued fine-tuning of any strategy you think could produce favourable results
- Developing and adjusting strategies that are tailored to your individual preference in terms of risk versus reward.
When implementing any trading strategy, it’s important to take the necessary steps to manage your risk. Even in a simulated environment where there’s only virtual funds to be profited and lost, it’s vital to get exposure to positions that suit your risk appetite.
Note: Past data isn’t necessarily a good predictor of future market behaviour, so no strategy can guarantee accuracy
Have a great week ahead!