Backtests - how to use them

Can a strategy that looks promising turn out to be unprofitable? Yes, if you don't test it beforehand. That's what backtests are for - testing against historical data. 

If you have not read the first part of this article, you should start with it - there we have explained what backtests are and why they are necessary for a trader. In this part we will go deeper and consider how and why to use backtests.

Testing trading strategies

Before you start using a trading strategy in the real market, it is important to make sure that it works at all. That's what backtesting is all about. The goal is to check how profitable the strategy could have been had it been used in the past. This avoids losses due to mistakes that could have been avoided at the preparation stage.

The first stage is to formalize the idea. The strategy must have clear rules: when to enter a trade, when to exit, how to set stop-losses and take-profits. Without this, it is impossible to conduct a test. A strategy cannot be vague, based on emotions or “feelings”. Only logic and clear parameters.

Next, the backtest itself is involved. For example, you take the data on Bitcoin for the last two years and check how the strategy would work in this area. During the test, the system shows you all the entries and exits of trades. You can see which trades were profitable and which trades were unprofitable. It is important to pay attention not only to the overall result, but also to the drawdowns, the number of consecutive losing trades, the risk/profit ratio. All this affects the final reliability of the strategy.

After the test, you receive a report. It may include a profitability chart, a table of trades, average profit and loss, and performance ratios. This report is the main element of the evaluation. If the results are bad, it does not mean that the idea is bad. It may need to be refined. This is why testing is not a one-time check, but part of a trader's regular work. You improve, retest, optimize.

Platform for backtests

There are different tools for backtesting, but for most traders two categories will do: visual platforms and scripting environments.

The Veles platform is designed specifically for traders who use algorithms, indicators, and trading bots. One of its main tools and advantages is the ability to conduct backtests. Here this process is maximally simplified: there is no need to write code, manually collect data or do complex configuration. Everything works through a simple and intuitive interface.

The user selects a bot or a trading strategy, customizes the parameters and starts the test. Veles runs the strategy on historical charts for the selected period. You can test how the strategy would behave in high volatility, during a market downturn or in flat conditions. This allows you to see how stable the strategy is in different market phases.

Another advantage of Veles is visualization. The results of the test are displayed in the form of a balance chart and a list of trades. You can see where the strategy opened positions, how stop losses worked, which orders brought profit. All this helps not just to look at the numbers, but to understand the logic of the algorithm's behavior, find weaknesses, identify false signals and adjust settings.

Among Veles users there are those who tested simple strategies based on moving averages crossover. In some cases, such strategies gave positive results in a bull market, but showed poor performance in a sideways market. This helped traders to adjust signal filters and adapt the bot to different market phases.

Another case is a strategy based on RSI and volumes. The backtest showed that in combination with the trend filter it reduces the number of false entries almost twice. Based on this data, the user optimized RSI parameters, selected oversold and overbought levels, and after the retest the strategy showed a more stable income with a lower drawdown.

Averaging strategies, including DCA-bots, are also tested on the platform. One of the users tested the model on the Solana token and found out that when buying at a certain percentage of decline and selling with a set profit, the bot generates a positive result even in high volatility conditions. This provided the basis for a long-term risk-controlled strategy.

Veles Finance provides more than just tools for testing. It is a full-fledged environment where a trader can develop, test and refine his ideas without leaving the platform. Everything works in the browser. There is no need to download software or write scripts. This approach makes backtests available even to those who have not been involved in technical analysis at a deep level before.

How to improve a strategy after a backtest

After you have conducted a backtest, you should not immediately launch the strategy into real trading. The test results are not a final verdict, but a starting point for improvement. For a strategy to become reliable and sustainable, it needs to be improved based on the data obtained. This is an important stage that helps to reduce drawdown, increase profitability and minimize risks.

The first thing to look at is the maximum drawdown. If the strategy was showing good profits, but at the same time had strong balance dips, this is a worrying signal. So, you need to change the entry parameters, limit the number of simultaneous positions or revise the stop loss levels. It often happens that too aggressive settings give good figures on paper, but are not suitable for the real market. Therefore, moderation is important.

Next, you need to examine the quantity and quality of trades. If the strategy makes a lot of entries, but most of them do not yield profits, it is worth strengthening the filters. It can be additional indicators, filtering by trend or limiting trading during news. If, on the contrary, there are too few trades and you miss opportunities, perhaps the strategy's parameters are too narrow and you should weaken them.

It is also important to analyze in which market conditions the strategy performs best. For example, it may work well in a trend, but drain your deposit in a sideways movement. This means that you need to implement a market phase filter. It can be an ADX indicator, MA or visual analysis. Or customize the strategy so that it is turned off in case of weak price movement.

The next step is to work with risks. Even a good strategy can lose capital if you calculate the position volume incorrectly. After the backtest, you should recalculate your mani-management. Perhaps you should use a fixed percentage of the deposit rather than a fixed amount. This will keep a balance between profit and safety.

Another point is timeframe optimization. Sometimes a small change in the timeframe changes the behavior of the strategy. For example, if the results are weak on a 15-minute chart, try 30 minutes or 1 hour. This can give cleaner signals and reduce the amount of noise.

Don't forget to backtest again after each change. Improvements should be confirmed with a new series of tests. If after adjustments the strategy shows stable results on different parts of the history, then you are moving in the right direction. 

On the Veles platform, all these steps are implemented quickly and conveniently. You can make changes, retest, compare versions of strategies and immediately see the results on the chart. This speeds up your work and helps you avoid common mistakes.

After the backtest results, it is important not just to be happy with the numbers. You need to deeply analyze the behavior of a strategy and constantly improve it. This is the essence of professional trading - constant development and adaptation.

FAQ

1. What is a backtest?

It is testing a trading strategy on historical data.

2. How can I test a strategy if I don't know how to program?

Use backtests from Veles. They allow you to do everything visually.

3. Why doesn't the chart appear in the backtest?

Often it is due to a bug in the code or timeframe mismatch. Check the strategy parameters.

4. Is the backtest reliable?

It gives you a benchmark, but it does not guarantee future profits. The market can change.

5. Where to get data for backtest?

In TradingView or on specialized platforms like Veles. They provide trading history for analysis and backtest data.