Backtesting a trading strategy is a great way to get an idea of how effective your system will be. You can find out if your strategy will work on any particular pair of stocks.
There are many free backtesting tools available online. They make it possible to test hundreds of strategies in a single day. One example is TradingView. It offers a free strategy tester on each chart.
Before you begin testing a strategy, you need to decide on the time period, the type of asset, and the data set. These decisions will affect the outcome of your backtest.
The ideal backtest chooses sample data that is appropriate for the period you have selected. This includes a representative sample of stocks, as well as companies that went bankrupt or were liquidated.
You need to be aware of two factors when you are backtesting a trading strategy: the look-ahead and the survivorship bias. Both have a negative impact on your profitability.
The look-ahead bias is caused by the fact that the data you have available after the model has been run may be incorrect. Likewise, the survivorship bias is caused by the fact that your data is incomplete.
You also need to be aware of the fact that the majority of market traders take excessive risks. This can result in runs of losses.
To ensure you are maximizing your return, you need to keep your trading costs low. Lower exposure can reduce your overall losses. Also, you can increase the average number of bars held per trade. Raising your bar count will also decrease your commission costs.