What is backtesting, how to apply it to a trading strategy?

Comparison between backtesting, scenario analysis and paper trading

Backtesting differs from scenario analysis and paper trading to test the effectiveness of a trading strategy. For example, if an impending lockdown is going to occur in the UK in response to another Covid-19 outbreak, this will impact market prices. In this case, it is advisable to analyze the performance of certain sectors and the strategies that have produced good results in the past.

In contrast, scenario analysis tests a strategy against a set of hypothetical market conditions that may not exist in historical data.

For example, you can run a simulation to check the performance of a healthcare-related equity portfolio using a certain strategy if Covid-19-related regulations continue. Different key variables would need to be taken into account, such as changes in interest rates and inflation.

The ” paper trading (paper trading), involves applying a trading strategy to current market conditions without risking your capital.

Clients test their strategies on paper, mock on the trading platform, trade at exact entry and exit points under certain conditions, and document the results.

Run these simulations on ProRealTime (PRT) for best results. This platform allows you to test a strategy, move forward in time and use a market screener to filter stocks that correspond to your level of risk.

You can also trade risk-free in today’s markets by opening an IG demo account.

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