With everyone trying to understand the pattern of profit-making, there is no dearth of trading ideas in the crypto world. However, these ideas cannot, and should not, be applied recklessly as a vast amount of money rides on crypto investments. That’s where backtesting your strategy walks into the picture.
What is Backtesting?
Backtesting is like a viability check for a trading strategy by testing it out on the past data. It is a great way to quantify how an idea will perform in applied a particular market condition. Professional investors use backtesting to test their new ideas before applying them in the real world. They check their strategy and fine-tune it recursively with the help of data till a viable and good performing technique is arrived at.
There are backtesting tools and software available in the market for this purpose. Even though backtesting is safe as it does not involve real funds, it can inspire beginners to apply a strategy approved by a wrongly done backtest. Thus, the safest option for newcomers is to subscribe to leading crypto signals providers, who already run backtests before using any new strategy in the market.
Does it work?
Backtesting might or might not work as a lot depends on a lot of variables. Backtesting done on a dataset that does not reflect the market realities today can lead to inaccurate results. Thus, it becomes crucial to carefully select the data, requiring a deep level of market understanding.
Additionally, the trader decides the goal of their backtest. It would involve formulating the desired results, at which they will consider their strategy a success or a failure. It helps in better monitoring and control of the process when they are in the midway. It also serves to make an impartial judgment once they have the results in hand.
There is an additional reason why backtesting is not for beginners and why they should rely on best crypto signals as a better-suited strategy. Backtesting software and tools are too expensive, and not all of them are equally good. Thus, even buying the right tool within a reasonable price range can be an obstacle for a beginner. Although, expert traders many a time rely on manual backtesting that does not need automated software. But manual testing is an even more involved exercise requiring more skills and expertise. On the other hand, it is automated backtesting that employs computer codes and software to do exactly what happens in manual testing, but with the help of a machine. Still, it is more of a time and effort-saving tool which still requires someone knowledgeable who knows what they are doing.
How Paper trading compares to Backtesting
One serious drawback of backtesting is that the idea is tested on past data. Historical data is not always a good representation of the future market. Paper trading is a method to optimize backtesting to meet the present market conditions.
In Paper trading, the traders simulate the live market and apply their strategies to the current data. There is no risk as no real money is involved. However, all the trades are logged by the trader to keep a proper check on the strategy. Generally, Backtesting and Paper trading is used in combination to arrive at a viable strategy.
Testing your strategy on real market data is an essential step to trade in cryptocurrencies. As not all strategies are suitable to all market situations, it becomes necessary to be on more stable ground. However, people not having enough time or expertise to make their strategies or conduct backtests and paper trades, make profitable deals using crypto signals.