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<\/a><\/p>\nThere comes a time in every trader\u2019s development when one accumulates too many trading strategy ideas to test \u201cmanually\u201d in a real-time sim environment. That\u2019s just the beginning.<\/p>\n
Every strategy can spawn multiple variations. Once you get a handle on your strategy, even the slightest tweak can yield extremely different results. Hence, one strategy becomes two related but separate strategies.<\/p>\n
So, if you had five strategies with three tweaks per strategy then you essentially have 25 different strategies whose results can vary considerably. As a trader, you have a responsibility to rank every strategy that might end up seeing the live market.<\/p>\n
In short, you need to generate performance stats for each strategy you may one day use.<\/p>\n
The only time-efficient solution is to backtest your trading strategies<\/strong>.<\/p>\n Backtesting is an evaluation method that allows you to see how well a strategy might have performed in the past. The idea behind backtesting is that its past performance might resemble future results. The keyword here is \u201cmight.\u201d<\/p>\n There are many variables that can get in the way, from major shifts in the market environment to the fear of following through with trading rules.<\/a><\/p>\n These variables can also make a huge difference. And that\u2019s why you always come across the disclosure that says \u201cpast performance doesn\u2019t necessarily indicate future results\u201d because it doesn\u2019t.<\/p>\n BUT, backtesting is the only way to comprehensively and efficiently evaluate a trading strategy in a simulated environment. So, think of it as a requirement but also a \u201cnecessary evil\u201d in cases where the results may still differ from live market performance.<\/p>\n The truth is that not all orders will be filled the same way they might (or might not) get filled in a live market. There will be variances. And negative variances can mean costly slippage or, even worse, missed trades.<\/p>\n Also, you may accidentally miss trades or be too afraid to take a trade or you might close trades due to emotions. This is a big part of trading, and it\u2019s virtually absent in a backtesting environment.<\/p>\n You\u2019re wondering if these small differences can make a big difference in a live market. The answer is yes; perhaps more than you may think.<\/p>\n At the very least, you may want to look at the win\/loss rate, profit factor, and drawdowns among other stats. The process seems pretty simple though it can also be tedious.<\/p>\n But it\u2019s the most time-efficient way to get a feel for a trading strategy before taking it into the live market.<\/p>\n There are a couple of caveats; very important ones.<\/p>\n 1. Sample size is critical<\/strong><\/p>\n Suppose you test a strategy using a week\u2019s worth of data and it produced outstanding performance results. Add another week to it and the results will likely change, for better or worse.<\/p>\n Still, a few weeks of data will not give you a reliable evaluation of your strategy.<\/p>\n Years or even decades of data might give you a more accurate picture. In other words, the larger the sample size, the more realistic the backtesting results.<\/p>\n 2. Don\u2019t curve fit your strategy<\/strong><\/p>\n In grade school, there\u2019s a difference between \u201cstudying to pass the test\u201d and \u201cstudying the material\u201d to pass the test. The former is narrower and more selective while the latter is more comprehensive and robust.<\/p>\n If you over-optimize your strategy to fit the curves of a given time period, it\u2019s highly unlikely that it may perform just as effectively over another time period.<\/p>\n For instance, if you over-optimize your strategy to a period of non-trending activity, then it\u2019s likely that a trend will through your strategy off balance.<\/p>\n However you tweak your strategy, the more you curve-fit, the less robust it becomes across different market conditions.<\/p>\n 3. Fear is never a factor when backtesting<\/strong><\/p>\n What you\u2019re gaining in backtesting is time. Even if you\u2019re backtesting on an Excel spreadsheet, once you\u2019ve entered your data and conditions, it doesn\u2019t take long to analyze hundreds of trades.<\/p>\n If you\u2019re using a backtesting software, you can get results on hundreds to thousands of trades in a matter of seconds with a click of the mouse.<\/p>\n What\u2019s missing in this process are emotions. You don\u2019t feel the fear, hesitation, or surprise when placing each trade.<\/p>\n And that\u2019s a big disadvantage because these feelings tend to get the best of you when trading manually in a live market (we\u2019ll cover this more thoroughly in the sections to come).<\/p>\n So, now you understand what backtesting is, why it\u2019s important, what to look out for, and its benefits and limitations.<\/p>\n Backtesting and forward testing are two ways to test your futures trading system in a simulated environment.<\/p>\n For our purposes, we\u2019ll substitute the term \u201cmarket replay\u201d with forward testing because that\u2019s the name of the software we have available on our trading platform to perform forward testing.<\/p>\n Backtesting provides instantaneous results<\/strong>. The software can calculate days to years of trading data in a matter of seconds, giving you performance results almost instantaneously.<\/p>\n You\u2019re virtually giving the computer trading instructions and asking it to place simulated trades across a given time period. Once you press the \u201cgo\u201d button, it will crunch all the data and give you the trading results.<\/p>\n The advantage of backtesting<\/em> is that you can reduce minutes to years to just a few seconds.<\/strong><\/p><\/blockquote>\n Plus, you can select almost any historical period to trade (e.g. an uptrending, downtrending, or flat market).<\/p>\n The disadvantage of backtesting<\/em> is that you can\u2019t experience any of the emotional distractions and execution errors that happen when trading.<\/p>\n Market Replay allows you to trade a simulated market in real time<\/strong>.<\/p><\/blockquote>\n But it\u2019s much more than a \u201creal-time\u201d demo.<\/p>\n With Market Replay, you can pick different historical trading periods. You can speed up time, slow it down, stop it altogether so that you can move bar by bar at your pace, and you can even go backwards in time.<\/p>\n The advantage of Market Replay<\/em> besides giving you full control of historical market time is that you can get close to experiencing the emotions of each trade, the difficulties of each setup, and the potential execution errors that can happen in a live environment.<\/p>\n The disadvantage of Market Replay<\/em> is that it\u2019s much more time consuming than a backtest but still more time-efficient than a real-time demo simulation.<\/p>\n As a trader, you might want to try both. So, let\u2019s get to the mechanics of using each software, starting with Market Replay.<\/p>\n Optimus Futures\u2019 Market Replay software<\/a> has quite a few features that differentiate it from other backtesting software. Market Replay allows you to\u2026<\/p>\n Here are the steps to take to manually backtest a strategy using Market Replay.<\/p>\n 1 \u2013 From the main menu, launch Market Replay<\/strong>.<\/p>\n 2 \u2013 Select a trading instrument for testing > select a timeframe > leave the default data type \u2013 Bid\/Ask\/Last.<\/p>\n 3 \u2013 Select the testing range > set the initial balance to $10,000 in the module settings.<\/p>\n Note that you can open a single position\u2026<\/p>\n Or multiple positions\u2026<\/p>\n 4 \u2013 Once you\u2019ve selected your instruments and configured your parameters, click the \u201cStart\u201d button to begin your test. The \u201cStart\u201d button will change to \u201cStop\u201d once your testing begins. You can also open all the necessary panels for testing by clicking on the \u201cOpen panel\u201d button.<\/p>\n 5 \u2013 You can also change the speed of testing, stop time by pausing, or you can make it move forward by as little as a tick (press F12 or the button \u201cOne Step Forward\u201d).<\/p>\n 6 \u2013 You can also try placing your orders directly on the chart, using various Order Entry windows, or via DOM.<\/p>\n Your trade history and performance results will be displayed on the Trades panel.<\/p>\n Once you\u2019ve completed your testing, you will want to analyze the results of your strategy and execution.<\/p>\n The Account info panel will provide you with basic information regarding your trading performance, namely balance, equity, open positions, and profits & loss.<\/p>\n This is where Excel can come in handy. Fortunately, you can upload all of your trades using the export function on the Trades panel.<\/p>\n There is so much more to analyzing results. You may want to consider the following:<\/p>\n (Win % x Average Win Size) \u2013 (Loss % x Average Loss Size)<\/p>\n Market Replay can provide a semi-realistic environment for you to test your trading stategy. It may be the closest experience you can have to trading a live market.<\/p>\n If you have several strategies you need to test but don\u2019t want to take the time to manually execute your trades, then you might want to consider using backtesting software that can do the job in a matter of seconds.<\/p>\n That\u2019s what we\u2019re going to cover next.<\/p>\n There are two ways to use this software: Quick backtesting<\/strong> for immediate results, and Interactive backtesting<\/strong>.<\/p>\n We\u2019ll cover the interactive mode before we touch upon the quick backtesting mode.<\/p>\n Backtesting software can calculate days to months of trading data in a matter of seconds, giving you performance results at almost any speed.<\/p>\n Take a look at your dashboard:<\/p>\n This panel can be broken down into two segments: strategy parameters<\/strong> and results<\/strong>.<\/p>\n Here are the steps you can take to backtest a strategy:<\/p>\n 1 \u2013 Launch the backtesting panel<\/p>\n 2 \u2013 Select your strategy<\/p>\n 3 \u2013 Set up the trading parameters<\/p>\n 4 \u2013 Press the Run button<\/p>\n A few things to note:<\/p>\n Be sure you\u2019ve switched to Backtest and not Live<\/strong><\/p>\n The reasons for this are obvious. Also, switching to Backtest will give you an additional block that is specific to the testing environment.<\/p>\n Select your Historical period<\/strong><\/p>\n Once you\u2019ve made your selection, historical data will be downloaded to your symbol of choice.<\/p>\n Environment Settings<\/strong><\/p>\n The addition settings screen<\/strong> allows you to set up Exchange or Market-specific parameters to emulate a more accurate environment by specifying your data.<\/p>\n Check out the View tab for general parameters and Per-selected-symbol tabs, for specifying symbol-specific parameters.<\/p>\n If you want to visualize the testing process or interact with it while it\u2019s in process, you can use the Interactive mode <\/strong>at the footer of your panel. The speed slider <\/strong>in the interactive mode will allow you to slow down or speed up the testing process.<\/p>\n Backtesting Results<\/strong><\/p>\n The Visualizer button<\/strong> allows you to track the strategy operation during the history playback. Check out Account performance<\/strong> for your results and the Chart panel <\/strong>which shows you the strategy as it visually unfolds.<\/p>\n If you prefer, you can also visualize the process using Time&Sales, DOM Surface, and TPO Chart, etc.<\/p>\n The New version button<\/strong> near the Run button is an important one to know. This is because you will likely be tweaking your strategy constantly as you fine-tune its performance. Use this button to update your trading code.<\/p>\n If you just want to plug in your trading rules, hit a button, and see the results immediately, use the quick backtesting mode.<\/p>\n You can do this by turning off the Interactive mode. This will allow you to test your strategy at maximum speed. The main drawback here is that you won\u2019t be able to see the process, just the results.<\/p>\n Backtesting requires its own unique set of skills. Choosing the right historical data, tweaking strategies in a manner that doesn\u2019t curve fit the data, and discerning between backtested results and the real-time experience of trade execution entails a keen sense of how to converge simulation with reality.<\/p>\n Although backtesting is not the same as the live market, it\u2019s probably the closest you will come to the live market before risking your capital.<\/p>\n So, make backtesting an integral part of your trading approach but always be sure to follow it up with what counts most, and that\u2019s trading the live market<\/a>.<\/p>\nWhat Is Strategy Backtesting?<\/h2>\n
Wait, why might it differ from live market results?<\/h3>\n
How to Backtest a Trading Strategy<\/h2>\n
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3 Factors to Consider When Backtesting Trading Strategies<\/h2>\n
Should you \u201cbacktest\u201d or \u201cforward test\u201d your trading strategy?<\/h3>\n
What\u2019s the difference between using Backtesting versus Market Replay software?<\/h2>\n
How to manually test futures trading strategies with Market Replay<\/h2>\n
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<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\n<\/a><\/p>\nAnalyzing your Market Replay Results<\/h2>\n
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<\/a><\/p>\nHow to Backtest Trading Strategies on Optimus Flow<\/h2>\n
Interactive Backtesting<\/h3>\n
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<\/a><\/p>\nQuickly Backtesting Trading Strategies<\/h2>\n
Backtesting Trading Strategies Is Both an Art and Science<\/h2>\n