Traders create algos on the basis of some underlying hypothesis. Once created there needs to be a way to test and validate the hypothesis out.
Backtesting assesses the viability of a trading strategy by analyzing how it would play out with historical data.
Backtesting allows a trader to simulate a trading strategy using historical data to generate results and analyze risk and profitability before risking any actual capital.
A well-conducted backtest that yields positive results assures traders that the strategy is fundamentally sound and is likely to yield profits when implemented in reality. A well-conducted backtest that yields suboptimal results will prompt traders to alter or reject the strategy.
There are many different metrics that can be used to measure the results of a backtest, the most commonly used are:
- Annualized returns vs a benchmark
- Sharpe Ratio
At Mudrex, we provide one of the best backtesting platform for your strategies, a product that significantly reduces the time you spend on optimizing and validating your ideas.
You can read more about backtesting here.