Course Content
What Is Backtesting?
Backtesting can be an important step in optimizing how you engage with financial markets. It helps you learn whether your trading ideas and strategies make sense and if they could potentially turn a profit. But how does backtesting a simple investment strategy look like? What should you be wary of when testing trading strategies? Is backtesting similar to paper trading? We'll answer all these in this article.
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What Is Backtesting?
About Lesson
Let’s go through a dead-simple long-term strategy for Bitcoin.

Here’s our trading system:

  • We buy Bitcoin at the first weekly close above the 20-week moving average.
  • We sell Bitcoin at the first weekly close below the 20-week moving average.

This strategy produces only a few signals per year. Let’s look at the time period starting from 2019.

Bitcoin weekly chart since 2019.

The strategy produced five signals in the measured timeframe: 

  • Buy @ ~$4,000
  • Sell @ ~$8,000
  • Buy @ ~$8,500
  • Sell @ ~$8,000
  • Buy @ ~$9,000

 

So, our backtesting results show that this strategy would have been profitable. Does this mean it’s a guarantee it will continue to work? No. It just means that looking at this specific data set, the strategy would have turned a profit. You could think of this result as a rough benchmark.

Bear in mind; we only looked at less than two years of data. If we’d like to turn this into an actionable strategy, it may be worth going back further in time and test it with more price action.

With that said, this is a promising start. Our initial idea seems to be sound, and we may be able to create an investment strategy from it with some further optimization. Maybe we’d like to include more metrics and technical indicators to make the signals more reliable? It’s all up to our own ideas, investment time horizon, and risk tolerance.

 

Exercise Files
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