BackTesting your Trading Strategies – A Comprehensive Guide

The world is filled with trading tips. From the best trading strategies to the most recommended supportive technologies, one thing the world of cryptos is not short of is opinions on how to become rich ASAP.

While this abundance of trading advice ranges from absolute scams and false promises to expert insights and genuine wisdom, a few cornerstones for crypto trading are unanimously agreed upon.

The consensus centers on one simple and intuitive guideline: never implement a trading strategy without testing it first.

In this blog post, we’ll learn everything there is to know about our recently launched backtesting feature: what it is, what it’s good for, how and where to do it, and why it is a crucial tool for active crypto traders. As usual, we’ll wrap things up with valuable tips on making the most of this new powerful instrument.

Before we begin, please remember that the information in this blog post is intended for educational purposes only and should not be considered financial advice. Traders are advised to carefully consider their financial status, trading goals, and risk tolerance before employing any crypto trading strategy. Crypto trading involves inherited risks; consulting with a qualified financial advisor is highly recommended.  

What are we backtesting?

Our new backtesting features are designed to optimize your chosen signals bots. In other words, the underlying technology of the signals channel is the basic structure of our trading strategy, the same structure we’ll try to optimize through backtesting.

With back-testing, traders can now evaluate the performance of their received signals firsthand, adjust them according to their personal risk tolerance, and boost the overall results of their expert copy trading schemes.

The underlying notion behind the backtesting method is that the more stable and consistent a trading strategy has performed in the past, the more likely it is to perform similarly in the future under the same or similar circumstances.

Backtesting – How Does it Work?

Backtesting is the rigorous process of analyzing vast amounts of historical market data to design, optimize, and verify our trading strategies before taking them live.

Until a few years ago, backtesting a trading strategy correctly required hundreds of hours of tedious work. Now, through automation, this process is just a few clicks away to complete.  

In general, our backtesting process can be divided into three stages.

First, traders must choose the specific signals channel they wish to backtest. Our marketplace is an excellent place to browse for potential signal channels. Here, you can find one of the biggest selections of renewed signal providers, including crucial analytics like past results and customer reviews.

Then comes stage two, the basic configuration of the back-test. This entails following the instructions in our step-by-step Backtest guide, and choose the preferences and limitations of the backtest, such as preferred exchanges, initial funds, the time frame of the test, and more.

After the basic structure of the backtest is complete, the next step is to configure the parameters we wish to optimize. Since signal channels do most of the heavy lifting by providing pre-made, closed-sourced strategies, traders are only left with fine-tuning the strategy. This includes some critical parameters for entering and exiting trades, like trailing, leveraging, take profit, stop-loss, and trailing stops, as well as other advanced settings that can be personalized.

While the process of back-testing is pretty straightforward, traders need some trading experience and prior knowledge about how to read and work with optimization reports to improve their strategies through back-testing. 

In other words, while experienced traders might feel comfortable making many adjustments, less experienced traders shouldn’t take on more than they can handle. Remember that in many cases, more doesn’t necessarily mean better and that, in some cases, only minor changes are needed, or the original settings might be the best option to move forward with. 

Once stages one and two are complete, ideally according to our guidelines, traders can let our platform run the optimization test. This calculation takes a bit of time, depending on the timeframes, number of parameters, the amount of data, and computing power you are working with. At the end of the process, you’ll get the optimization report.

The last backtesting stage involves thoroughly reviewing the optimization report to make the appropriate changes. The report’s sections allow traders to see the overall performance of the strategy, including some indications about which settings and parameters should perhaps be modified to achieve better outcomes.

Suppose you’ve done enough research on choosing the most suitable signal channel for you after repeating stages two and three enough times. In that case, you should have a functioning and reliable crypto trading bot personalized to your specific preferences and, more importantly, a strategy you feel confident in managing your positions while sleeping.

Useful Tips for BackTesting

As promised, here is a list of some of the crucial aspects of backtesting traders should be aware of, as well as some expert guidance on improving the efficiency and reliability of your backtests.

Practical advice for setting up the backtest:

• Choose Appropriate Strategies – Backtesting might be a frustrating process that won’t deliver sufficient results without a relatively reliable trading strategy as a solid foundation. Choose your signal providers carefully. Ensure they are focused on the same cryptos and exchanges that suit your preferences, like ensuring their working methods and risk allocations are similar to yours. 
• Initial Funds – While it makes a lot of sense to set the initial funds as equal to what you’ll be trading live, you don’t want to choose an amount that is too small to limit the trading strategy’s performance during the backtest. For your convenience, we recommend setting the initial funds to $100K, which won’t affect the number of trades and will make it easier to calculate profits, losses, and drawdowns in percentage form, not just absolute numbers.
• Number of Parameters – While it is somewhat difficult to predict which of the parameters that can be customized have the most potential to boost up your trading strategy, there are some limitations to the number of parameters that traders are recommended to examine under a single back-test. For more trustworthy results, traders are advised not to check more than three or four parameters simultaneously. By solely focusing on a different setting each time, trades are increasing the reliability of the optimization report and learning about the different settings’ specific effects on each result, which can be both helpful and educational.

Practical tips for reviewing and working with the optimization report:

• Total Profit/Loss – Although displayed at the top of the report, this is the backtest’s bottom line. As a preliminary rule of thumb, traders should aspire to a sufficient net profit that is aligned with their trading goals and profitable enough to withstand trading fees and other associated costs. Otherwise, it might not be worth your time, effort, and hard-earned cash.
• Number of Trades – As we briefly mentioned, backtesting is a statistical calculation that aims to give us a higher degree of certainty that a trading strategy is performing consistently over the long term. As such, sufficient data must be significant from a purely statistical standpoint. Traders should ensure their optimization report covers at least 40 to 50 trades to have enough data to work with.
• Win/Loss Ratio – This refers to the proportion of profitable and unprofitable trades in the strategy. While the higher, the better, it is also essential to have realistic expectations for your trading strategy. It is highly recommended that traders confirm that this ratio is reasonable and sufficient for them to move forward.
• Maximum Drawdown – This is a very common risk metric in finance, but trading is specific. It measures changes in the account’s total value or calculates the most significant decline from its peak value before a new high is attained. Traders are advised to ensure their maximum drawdown aligns with their risk tolerance. 

As a last piece of advice, we urge traders to be organized, work methodically, follow our instructions, and not cut corners. Remember that despite its limitations, backtesting is arguably the best tool a trader has for designing and optimizing a trading strategy. Still, it is also valuable for learning more about technical analysis, market behavior, and the disparity between past, present, and future performances. There is something to learn from each test you do. If you work correctly and pay attention to the process, your bottom line and overall trading skills are expected to improve.

Final Words

Backtesting, the newest addition to our already renowned crypto trading platform, is yet another step towards our goal of leveling the playing field between institutions and private investors and further democratizing automated trading for retail traders.

While past results do not guarantee future performance, backtesting is arguably still the best method for traders to ensure that what is working, in theory, will not disappoint in practice.

In other words, backtesting is a crucial part of any successful trading strategy, especially in pre-made strategies like signals trading. It’s one of the best methods for personalizing your trading strategies according to your specific needs and desires. It is highly recommended that you test and optimize your strategy before taking it live. You’ll be surprised how much it can improve your results.

With our new backtesting features, traders can optimize and personalize their trading signals more efficiently than ever and achieve better results. This should improve your trading experience, making it more profitable and aligned with your risk appetite and other preferences. 

At Cornix, we support your crypto trading in every way possible. Our new backtesting feature is just the latest addition to our wide range of advanced trading tools, which give traders the cutting-edge advantage they need to trade cryptos successfully.

Traders are encouraged to explore this new tool and its features and back-test each of their strategies before going live to see how much it can elevate their bottom line.

With backtesting, signal trading, also known as expert-copy trading, is more alluring than ever. Don’t be afraid to explore everything this new and exciting feature has to offer and the positive effect it can have on your expert-copy trading.

You are welcome to visit our help center and blog to learn more about back-testing and start an exciting new chapter on your crypto trading journey. Here at Cornix, we support you in everything you need. 

Good luck and happy trading!

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