Why 'backtesting' should be concerned?

Backtesting is a reasonable way that allows a trader to evaluate a developed trading strategy against historic data to generate outcomes and analyze profitability and risk before running it with actual capital. Backtesting is helpful for both strategy developer and traders who want to purchase that strategy.


With backtesing, the developer can determine the trading performance, analyze the result, as well as improve the strategy to maximize profit with limited drawdown. Meanwhile, a trader can also run the backtesting to evaluate the effectiveness of the strategy before risking the actual money on it.


There are several numbers reported on the backtesing result. Among those result, here are 3 important data that needed to be concerned.


1. Profit Factor

Profit factor directly indicates the ratio of winning to losing trades. The number should be greater than 1.5, which represents that the strategy you test potentially gain profit. Number of winning trades is much greater than number of loss.


2. Relative Drawdown

Generally, most traders concern only on “maximum drawdown” to evaluate the effectiveness of the strategy. In fact, “relative drawdown” is much more significant. Why???

Because relative drawdown is the highest consecutive loss in percentage. For example, 20% relative drawdown means that it is possible that the trades may continuously lose, without gaining any profit, until reaching 20% loss from the balance.


3. Consecutive Loss

Consecutive loss represents the number of consecutive lost in a row, counting from latest winning trade. The more consecutive loss may torture traders and may make them hesitated. Some traders cannot tolerate to consecutive loss and may quit too early before gaining any more profit. The smaller the consecutive loss, the better the strategy.


Before launching our automated EA products, we consider all of these data to ensure that our EA products can generate maximum profits for our clients, while their capital is secured at the same time.

Backtesting the strategy helps improve its effectiveness. (Source: stockvault.net)

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