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Backtesting Process

Updated on 2010-04-27

QuantShare offers many tools to assist you in backtesting your trading ideas.

Before digging into the backtesting process, the first thing you will need is data. You will have to download historical quotes for the market you trade. You can also download any other financial data, including fundamental data, economic data, volume data, short selling data, commitment of traders, news...
In the sharing server, you can find many downloaders already shared by our members or you can create your own.

Once you have your data downloaded and saved into your databases, you will have to create trading rules.
For this, you can:
- Use our library of +200 indicators
- Create advanced rules formula (searchfor syntax)
- Create custom indicators or download indicators from the sharing server
- Create composite rules (Example: Stocks whose rate of change is higher than two times the standard deviation of the rate of change of all stocks)

Rules can be stored using the Rules Manager plug-in. The same plug-in lets you analyze and backtest simple rules in search of the most profitable ones or the ones that achieve any goal you specify. For example, you can analyze several rules and search for the ones that are likely to increase the stocks' volatility.

The ranking system plug-in calculates a value or score for each security given a set of nodes and formulas. Using this tool, you can implement and backtest ranking systems and then include the most profitable ones in your trading systems.

Two popular optimization algorithms, Population-based incremental learning (PBIL) and Genetic algorithm (GA) can be used by the Optimizer plug-in to analyze multiple variations/combinations of your rules and ranking systems.

Now that you have a set of profitable rules and a good ranking system, you can create a trading system using the Simulator plug-in of this trading software. This tool lets you specify several other settings, like the number of allowed position, whether the trading system takes long, short or long/short positions, stops... Advanced traders will love the money management tool; it allows them to test almost any strategy or trading idea.

The optimization of a trading system can be performed using the exhaustive optimizer or the intelligent optimizer plug-in we have introduced earlier. For more information, please look at the documentation or read the following posts (Optimization of a trading system, Money Management: Optimize a trading system).

The backtesting process is a continuous process; you should always test and backtest new ideas, new systems and new rules. Once you are confident with a trading system, you can assign it to a portfolio and rebalance that portfolio to get new buy/sell/short/cover orders.

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Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.