Back Testing Basics

Clear all

# Back Testing Basics

1 Posts
1 Users
0 Likes
826 Views
(@vanguardai)
Posts: 70
Topic starter

Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data. If backtesting works, traders and analysts may have the confidence to employ it going forward.
Investopedia

Average P/L
Average profit or loss will denote the amount of profit or loss which we can incur in one unit of time (days, minutes, hours) over a specific time period. Higher profits of course a good strategy.

Success Ratio
The success ratio is the number of trades we won or profited from to the number of trades we lost or incurred a loss on. This is an important indicator to understand how well our trading strategy is working and how much we need to update or optimize it in order to reap maximum benefits. Aim for higher success ratio.

Maximum Drawdown
Maximum Drawdown can be used as a measurement of risk. It denotes the maximum fall in the value of the asset from a peak value. This helps us assess the risk involved and the amount of loss that we could incur from our trading strategy, thus helping us decide the amount of risk we are willing to take. Minimal drawdown value is best.

Sharpe Ratio
Two strategies may give us equal returns, in this case, the strategy with a lower risk will be considered better than the other. This ratio would also tell a lot about the strategy or the trader, if the returns are consistent or more of luck. The measure of this is called the risk-adjusted return and can be calculated using the Sharpe Ratio.

Typically, Sharpe ratios are categorized as:
Below 0 : Poor
above 0 - 1 : Acceptable
above 1 - 2 : Good
above 2 - 3 : Great
Above 3 : Superb!

Risk-Reward Ratio
Risk-reward ratio measures how much your potential reward is, for every money you risk.
If you have a risk-reward ratio of 1:3, it means you’re risking Php1 to potentially make Php3.
If you have a risk-reward ratio of 1:5, it means you’re risking Php1 to potentially make Php5.

Expectancy
Trading expectancy shows what the typical profit is for each trade placed. If it's negative, the strategy is a loser. If it's positive, the strategy is a winner. The calculation combines how many trades are typically won with the average loss on losers and the average gain on winners.

Sources:
Posted : 03/01/2021 3:11 pm
Topic Tags
Share: