The most crucial element in building a trading strategy is backtesting. It is with the help of backtesting that you can:
- check if your strategy works
- modify it
- check the potential for new ideas.
The small downside of backtesting – it takes time, especially if you want to test strategy on more instruments.
In this article, I will show you a simple tricks that will greatly speed up testing strategy ideas.
You can use these ideas either if you are building a strategy from scratch or just want to modify existing strategies.
SHORTEN the time period of testing
Testing a strategy takes so much time because you often have to try it over a longer period of time for several instruments.
For example, you are testing your strategy over the last 2-3 years or even longer. In such a case, a proper testing of a system can take a whole day. Therefore, to speed up the process, we will shorten the period during which you test a strategy.
I reduce this period to about 1-2 months for day trading strategies and 3-6 months for swing trading strategies.
You have to decide how much you want to reduce the testing period. As I mentioned earlier, a lot will depend on which strategy you use and how many transactions you make during the day, at which intervals.
What is essential is not to select any random period from the past—more about this in the next section.
How to choose a backtesting interval
When choosing a shorter timeframe to backtest a strategy, do not select a period when the price was in a strong trend:
In strong trends, most strategies perform well or very well. Therefore testing in such conditions does not make sense for us.
We look for the market situation that will be the most difficult for our strategy. These are sideways movements or frequent trend changes in a short period of time.
It is in such situations that we will check how our strategy performs in the most critical aspects:
- What is the risk
- What is the size of losses
- How often there are losses
- What is the profit/loss ratio
- Can strategy avoid at least some of the range movement?
- And so on
This approach works incredibly well when you want to test several strategies and choose the best use.
Pay attention not only to profit
Of course, the objective of a strategy is to make as much money as possible. However, when testing a strategy, you should also pay attention to other results. It often happens that the final profit of a test can be distorted by one lucky trade.
Pay special attention to:
- number of losing trades
- The volume of losing trades
- The size of the losing trades compared to the size of the winning trades
- The overall profit factor.
For example, in Metatrader 4 I use Soft4FX software, which at the end of the tests gives me the possibility to save an HTML file with the strategy results. These are the same results that you can check when testing robots inside the Metatrader platform. As you can see in the screenshot below, you will find all the most important information I mentioned.
This way, knowing that you are testing the strategy in the least favorable conditions, you can assess the real risk of the strategy.
Testing during a trend
Of course, this does not mean that you should not test the strategy when the market is moving strongly in one direction.
In my opinion, it is best to start by testing the worst possible conditions (for most strategies, these will side movements). If you can decide on a particular strategy after these tests, you can improve it for strong trend conditions.
Testing over a longer period of time
The ideas presented above aim to test a larger number of strategies faster.
For example, I have developed five variants of a strategy that seem best to me. I test them over a short period of time in situations where the market has poorly behaved (sideways movement).
After these tests, I am left with two strategies.
Then, of course, I want to test this strategy on a longer time frame on the mentioned period of 2-3 years or longer. But at this point, I have already sifted through my strategy ideas and know which ones promise the best.
To sum up
Backtesting is the basis for building a solid trading plan. Even if you have an idea for a specific strategy, you often modify it; ideas for different strategy variants are born.
However, you have to test them all.
Therefore, shortening the backtesting period to the time frame when conditions were worst will give you quick answers. This way, you will find the best strategies to survive the sideways movement and have a chance to make money when conditions are much easier, and the price is moving in a strong trend.