Many techniques and statistics are available on the internet to help you start with your first algorithmic strategy and backtesting program.
"It is easier to define the future if you give a glimpse at the past," said a wise man and today, this statement is the backbone of many inventions and new technological researches. This is also the underlying theory behind the backtesting software, one of the core components of the trading system today.
A Backtesting System is a program to help traders measure the effectiveness of the trading strategy. Generally, strategy effectiveness (how a strategy would have performed) is calculated on the historical data. The basic hypothesis is that any strategy that functioned admirably in the past is probably going to function admirably later on, and conversely, any strategy that performed inadequately in the past is expected to perform poorly in the future.
Done manually in the past, today, many backtesting software is readily available in the market to help you with this fantastic backtesting process. Used by thousands of traders daily who make, convey and utilize these strategies to trade in the stock market.
Many techniques and statistics are available on the internet to help you start with your first algorithmic strategy and backtesting program. A few things ought to be remembered and should be taken into consideration off in case you are thinking of getting in algorithmic trading:
Net Profit or loss :
Any rational trader plays the game with only one focus, and that is maximising the profits. While backtesting a strategy, make sure it is giving the desired result on a broader time frame. Strategy giving desired results in 1999-2009 is much better than doing in 1999-2000.
Volatility:
It is generally the fluctuation in the market. In simple words, the maximum percentage upside or downside. A rational trader should try to keep volatility low to minimise the risk and maximise the chances of making profits.
Ratios:
As the name suggests, a few parameters are divided together to understand the stock and company's nature. It is beneficial in optimal position sizing and money management techniques. Some of the popular ratios include the profit-to-loss(P/L) ratio and the profits-to-equity(P/E) ratio. A rational trader should always take care of these ratios and invest accordingly.
Average return:
Looking at an average annual return is not the benchmark but an effective way of understanding the nature and strength of the strategy. Return is the only scoreboard for a trader. The more return he/she gets from a trade, the more successful they become in their trading journey.
How does Kuants' Algolab - The Best Algo Trading Platform, works?
1. Go to https://algolab.kuants.in/backtest/ and select your trading rules(strategies) through a simple form by logging in to your account from anywhere in the world.
2. Test your trading strategies on different market conditions and iterate unlimited times.
3. Once you start getting desired results, you can start trading using the strategies.
Kuants help you write your first strategy in 5 mins, without any prior knowledge of code or any programming language. You can visit First strategy to know more.
Moving further, I want to tell you that backtesting is not a full proof solution. A number of stock market algorithms working great in the past have failed to give results in the present. However, it is always great to explore and learn about new techniques and try them out in the real world.
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