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Basic knowledge of Backtesting

We all learn from mistakes. That is how we built this world and that is how human beings became the dominant species on the planet. When we see people like Cristiano Ronaldo and Samuel L Jackson excelling in their chosen fields, it is because they made mistakes in their early days, analyzed what they could have done better, and repeated the process until they were perfect. When it comes to trading crypto, you also have to practice and practice for you to become excellent at it. Psychologists say that it takes 10,000 hours for you to become a pro at any skill and trading is no different. However, if you adopt the right strategies, you can perfect trading much faster. In this article, we want to talk about how traders use backtesting to increase their chances of making profitable trades.

What is backtesting?

Backtesting is a tool that traders use to test new trading strategies. Essentially backtesting shows you how your new trading strategy would have fared if you had used it to call signals in earlier time frames. Backtesting has a huge advantage because it shows you if you have a solid, winning strategy or if you should scrap the trading setup altogether. This is especially for trading bots and algorithm trading (we will discuss this later in the article). Backtesting gives you the best feedbacks without you having to risk your hard-earned money in the trading process. If you are trading futures or you use a lot of leverage in your crypto trading, you should run your trading strategies through a backtest. 

The two major types of backtesting

It is important to note that backtests are not usually accurate most times. Therefore, it is necessary to invest your money wisely on a trusted site like Bitcoin Up. Be responsible for your actions and act based on the experience you have gathered and not on mere tests.

Manual backtesting

Manual backtesting is used by discretionary traders. Discretionary traders are directly in charge of every buy and sell decision. They monitor the market and then make signal calls based on real-life data. Manual backtesting is done by testing out developed strategies on historical data. This will be a bit difficult for short-term traders. However, long-term traders can manually backtest their strategies based on varied price outcomes in the past. Trading software’s like Trading view helps the discretionary trader to look at an asset over a specific time frame and call out future price signals based on that data. 

Manual backtesting allows you to train your emotions while confirming if a strategy is solid or not. Even though the advantages of manual backtesting are obvious, it also has its disadvantages. After you have spent time poring through data after data, you can find that your strategy is not useful and you’ve only wasted your time. However, it might be better to waste a few hours than waste a lot of money on a weak strategy. The amount of data you can analyze is also limited. 

Algorithm backtesting

Algorithm backtesting can only be used by system traders. System traders are financial analysts who know programming languages. They work by coding a trading strategy and running them against historical data and price outcomes. If you are an algo trader, systems backtesting can allow you to incorporate new strategies into your trading arsenal with confidence. One disadvantage of this strategy is that even though the traders can read the outcome of the data, they might not be software savvy. This means that per every trade setup you create, you need to pay a programmer to write and install the code.

Summary

If you want to be a successful crypto trader, you need to put everything in place to make it possible. Backtesting is a very effective strategy and it allows you to see your mistakes before you make them. We have introduced you to this lifesaver. You should incorporate it in your trading arsenal if you haven’t already!

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