Backtest

Backtest is a system used to test a trading strategy on historical data. The aim of this methodology is to evaluate whether a given trading strategy has a potential for live trading.  Backtests enable to learn trading without a risk of losing capital. There are 2 main types of backtests:

  • Manual (discretionary) – a software platform (e.g. SierraChart) is used for manual searching for trades on historical data of a particular market (e.g. futures, stocks). Over the time, the individual trades get manually recorded in  a spreadsheet as a trade log
  • Automated (algorithmic) –application of a code, including entry and exit conditions of a trading strategy, to a given market. The backtest results are immediately available. A typical software to be used for application of the algorithmic code is for instance TradeStation.

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