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As we enter the Digital Era, data analytics has drastically changed the way we digest insights and develop new ideas. In the trading world, new data is being generated every second, and thanks to charting solutions like TradingView, all the information is being recorded and visualized every second of the day.
I am sure we have all had that moment looking at the chart and entering into a trade saying "my guts are telling me to buy now!". Well.. if you are lucky, this may turn out profitable but it isn't quite the strategy we want to set in the long-term. A data-driven approach is likely to achieve better results in the long-run as traders can test their strategies with historical data.
What is Backtesting?
For traders who have heard of but unfamiliar with backtesting may think that it is code-heavy and is only useful for algorithmic traders or machine learning. However, backtesting isn't a complex concept that requires a lot of coding knowledge; in fact, it does not necessarily require any coding knowledge.
Backtesting is simply testing the trading strategy with past and historical price movements to see how successful the strategy would have been. Like many other tests, the more tests you do, the more reliability it would have. Therefore it may be better suited to algorithmic traders that can test with codes but the general idea of backtesting itself can be effective for non-coders as well.
How to Backtest?
As backtesting is the viability assessment of trading strategies, the first step to take would be to set up at least one strategy to test. When setting these strategies, it is often accompanied by indicators available on many charting tools. You can find the list of indicators available on MyCoinStory.com by clicking "Indicators" on the chart as shown in figure 1 below.
According to IG Group, a UK-based company providing trading in financial derivatives and stockbroking to retail traders, the most popular indicators are as follows.
Once you have set a strategy in entering and exiting a trade, you can test whether your strategies have worked. The way these strategies are tested may vary and here are some ways to do it.
- Excel - You can simply record data on an excel sheet. Examples of data that could be recorded are Strategy Name, Date, Market, Entry Price, Exit Price, StopLoss, and P&L.
- Chart - As a very brief way of testing, along with the indicators, just view the chart to see whether the trade would have been profitable without recording anything.
- TradingView - Tradingview has a strategy testing function where simple codes can be inserted and all the P&L and trade details will be illustrated. More details here
- Third-Party Solutions - Many solution providers support backtesting without having to code. Try googling them if you are interested!
It's always better to have more information and indications when entering and exiting a trade. Check what indicators can be used on MCS (MyCoinStory) and find the best strategy that works for you!
Traders always come first on MCS.
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