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Backtesting

Purpose of Backtesting

If you have followed the price action closely, and believe you have a strategy to profit; the cautious investor might ask: "Is it possible to simulate the performance before putting money at risk?" This is the essence of backtesting: a simulation is run to determine how well a strategy performs over a historical time period. Why is this important? Because the markets themselves are always changing! A strategy that may have worked for years may not work tomorrow if something shifts in the markets. Therefore, it is important to see how the strategy performs, and to test the strategy against different time periods.

Some of the work involved with backtesting includes gathering the historical data itself. We make that part easy with CSV files. The more difficult aspect is coding the actual trading strategy yourself in excel or another development environment. Some firms have developed proprietary backtesting software to run their own strategies. But more likely than not, trading professionals use the services of third party providers.

backtesting is a pillar of understanding trading risk and strategy expectations.

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There is no such thing as a strategy with an 100% win rate. And every trading strategy to ever exist will have a period of drawdown or a series of losses. BuildAlpha is third party backtesting tool that enables analysis of a multitude of pre-built strategise. There is no programming required with the software and the license comes with direct access to the software developer to ask any questions you have. If you have available time, invest in yourself and develop your own skill set to build it! Regardless of the strategy or who builds the backtest, backtesting is a pillar of understanding trading risk and strategy expectations.