You’ve probably seen a ball obstacle course video on social media, right?
Nobody can deny the time and effort it takes just to think of something like this.
Let’s say you built the course and dropped a ball on it. Would it succeed on the first go?
Most likely not.
It would take constant readjustments to get everything right.
Now, guess what?
The act of readjusting the course and trying again is literally the backtesting of the ball obstacle course.
Imagine you’ve just created a ball obstacle course but haven’t tested it.
Then, someone comes along and is willing to pay you £100 for getting the ball through the whole obstacle, but the catch is you give them £100 if it fails.
Would you take the deal?
Most people wouldn’t (and most traders wouldn’t too).
Even if they tested the obstacle course ten times.
But the reality is many traders are approaching the markets with untested strategies.
A trading strategy is just like a ball obstacle course, with the strategy being the course and your money being the ball.
Knowing this, should you use real money on a completely new strategy?
Anyway, If you’ve watched many ball obstacle course videos, you’d realize that most courses have some similar components. Those components would be considered indicators, patterns, and news in the trading world.
The act of stringing trading “components” together is a financial experiment before it becomes a strategy.
But what if the strategy is copied from another successful strategy?
You should still backtest it to be safe. There can be unnoticeable strategy information, such as the minimum balance required to use the strategy (to counter losing streaks) and the times and days the strategy produces losses.
Just like someone copying an obstacle course, the unnoticeable differences in the angles components are placed at greatly affect the course’s outcome.
To summarise:
An untested strategy is a hypothesis.
A tested strategy is a theory.
How do you perform a backtest?
Here are the several ways to perform a backtest:
- Spreadsheets and Charts: The classical way of manually backtesting your trading strategy.
- Replay Engine: Software that allows you to replay historical data and test trading strategies in a simulated environment.
- Coding: Using programming to run your trading strategy against historical data.
TradrLab is an AI trading intelligence platform to quickly build and refine strategies until they’re bulletproof.
We’re building the necessary tools to easily and instantly backtest strategies and provide you with valuable information. What TradrLab does in 1 minute takes days (or longer) for someone to do manually.
Also, our AI features give you actionable insights to assist you with crafting your strategies.
If you’re interested, become a beta tester below: