How Long Should you Backtest a Trading System? - Traders Log (2024)

FAQs

How Long Should you Backtest a Trading System? - Traders Log? ›

Aim for at least 200 trades in your backtest, but 500-600 offers even greater reliability for informed decision-making. Beware of "Data Fatigue": Excessively long backtests can mislead you by including drastically different market regimes.

When you are backtesting a day trading strategy (15-minute timeframe or lower), it is usually enough to go back two to three months and start your backtest there. When you are backtesting a strategy on a higher timeframe, you will have to go back 6 to 12 months.

A well-conducted backtest that yields positive results assures traders that the strategy is fundamentally sound and is likely to yield profits when implemented in reality. In contrast, a well-conducted backtest that yields suboptimal results will prompt traders to alter or reject the strategy.

On the other hand, if you're trading 1-minute, 5-minute, 15-minute, or scalping trades, limit your backtesting to a maximum of 3-6 months. Going beyond this timeframe becomes excessively time-consuming and will not give you any further edge.

Aim for at least 200 trades in your backtest, but 500-600 offers even greater reliability for informed decision-making.

Generally speaking, a good trading expectancy should be positive and ideally above 0.25%. This means that the expectancy ratio is higher than 1, meaning that traders can expect to make more money on their winning trades than they lose on their losing trades.

It takes around 1 hour to back test a strategy 100 times. If we find the profitability of a strategy by testing it 100 times, why waste time by testing it 1000 or 10000 times.

How can I backtest my strategy for free? ›

Free backtesting software

Microsoft Excel is a beginner-friendly backtesting software that involves the use of a set of formulas. Though there are other powerful tools too available, that makes testing a strategy easy and convenient. TradingView software helps the traders for stock and forex markets.

TradingView offers a rich set of tools to facilitate backtesting: Bar Replay Function: Enables manual backtesting. Pine Script: A scripting language unique to TradingView, allowing you to code your own strategies and then backtest them using the Strategy Tester.

The time period for backtesting depends on the average holding period of your position. If you are trading a strategy with a holding period of more than a month, then it is better to use a long time period, preferably 15 years. If you are creating an intraday strategy, then 10 years is a good amount of time.

When using Deep Backtesting, the limit is 200,000.

What is expectancy? Expectancy is what it sounds like. It helps you understand how winners, losers, gains and losses relate to each other over the long term. This process helps you understand what your trading system profits should be, and helps validate your backtesting.