Backtesting is a method where you apply your strategies to historical data to see how they would have panned out. Read more about it, its advantages and how to get started here -
In the highly volatile world of cryptocurrencies, trying out investment/trading strategies on the open market can turn into a costly affair. Fortunately, there are plenty of ways to test the waters before putting real money on the line. One of them is backtesting. In this article, we learn what backtesting is, the advantages of backtesting, and how to get started with it.
What is backtesting?
Backtesting is a method where you apply your strategies to historical data to see how they would have panned out. Crypto markets are cyclical, and if your strategy works effectively on passed data, the odds of your strategy working in the future drastically increase.
Backtesting isn’t new or unique to cryptocurrencies. It has been used for decades in stock trading, where even wall street has sophisticated algorithms to run backtesting programs before they greenlight a strategy on big money.
Advantages of backtesting
Backtesting has massive support in the trading communities. This is evident from the plethora of paid and free backtesting tools available in the market and the number of investors and traders that use them. Let’s discuss a few advantages of backtesting.
Proving that your strategy works
Every trader has their perspective on trading and the different approaches they take. New traders especially feel they’ve unlocked strategies that can be game changers. While that is a possibility, it is pretty unlikely. And trading cryptocurrency on hunches and unproven strategies means you’re risking hard-earned money.
The solution? You can backtest your strategies on historical data to confirm if they work or not. If they work on different timescales, you now have enough proof to risk hard-earned money on the trade.
Optimising your strategy
As a trader, you tend to change your strategies with experience. As you grow smarter with your trades, you want to keep what works and eliminate what doesn’t. The problem with this kind of optimisation is that it comes at the cost of real money.
The pocket-friendlier route to optimisation is by backtesting. You can run every new iteration of your strategy through backtesting programs and optimise your market moves. Eventually, you’ll get to a polished strategy that would have enough pedigree behind it for a real-world test.
Generating new ideas
As there is no real money involved with backtesting, you can experiment with some strategies that you otherwise wouldn’t. That’s when some eureka moments pop up, and traders can discover accidental brilliance.
It’s unexplainable how confidence can help one make better trades and investments. And backtesting is the perfect way to put the wind in your sails. After testing your strategies multiple times, you can be sure of their effectiveness. This will give you the confidence to dip your toes into crypto waters.
How to get started?
Now that you know what backtesting is, you can get started by running your strategies through backtesting platforms like 3Commas, Mudrex, Cryptohopper, Coinrule or Shrimpy. Find a platform that you think is most easy to navigate, and through trial and error, we’re sure you will stumble on to your winning strategy.
Most of these platforms will also have a trading/investing simulator. This allows you to try your backtested strategies on the live market using virtual money, just to be extra sure.
Please note that not all strategies that perform well with backtesting are guaranteed to do well in the real world. Backtesting just improves your odds and lets you optimise your strategies.