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Algorithmic Trading Backtesting with Python Explained (Trading Strategies Explained in Plain English)

Last Updated on 10 February, 2024 by Rejaul Karim

Trading has come a long way since the days of floor traders shouting orders across a crowded room. Today, traders use computer algorithms to make split-second decisions based on massive amounts of market data. These algorithms can be tested using a process known as backtesting, which involves using historical data to see how the algorithm would have performed in the past.

At “The Robust Trader”, we understand the importance of backtesting and have a huge library of trading strategies. They can all be delivered and explained separately in plain English if requested. Our goal is to help traders make informed decisions about their investments and reduce risk.

In this article, we will explain algorithmic trading backtesting in “plain English”. We will cover what it is, why it’s important, and how to perform backtesting using Python.

What is Algorithmic Trading Backtesting?

Algorithmic trading backtesting is a process of testing a trading strategy by simulating how it would have performed in the past, based on historical market data. The idea is to see how the algorithm would have performed under different market conditions and to identify any potential issues or improvements.

Why is Backtesting Important?

Backtesting is crucial for traders because it allows them to evaluate the performance of their trading strategies before they actually implement them. It helps traders identify any potential issues or problems with their algorithms and allows them to make changes and improvements before they start trading with real money.

How to Perform Backtesting with Python?

To perform backtesting with Python, traders need to have a basic understanding of Python programming and some knowledge of finance and trading. The following steps outline the process of backtesting with Python:

  1. Obtain Historical Market Data: The first step is to obtain historical market data, such as stock prices, trading volume, and other relevant data. This data can be obtained from various sources, including financial websites and APIs.
  2. Create a Trading Strategy: Next, traders need to create a trading strategy using Python. This strategy should take into account various market conditions and should be based on technical analysis, fundamental analysis, or a combination of both.
  3. Implement the Trading Strategy: Once the trading strategy has been created, traders can implement it in Python. This involves running the algorithm on the historical market data and evaluating its performance.
  4. Evaluate the Results: After the algorithm has been run, traders can evaluate its performance. This involves analyzing the results to see how the algorithm performed under different market conditions and to identify any potential issues or improvements.

In conclusion, algorithmic trading backtesting with Python is a powerful tool that allows traders to evaluate their trading strategies before they start trading with real money. At “The Robust Trader”, we have a huge library of trading strategies. They can all be delivered and explained separately in plain English if requested.  This is making it easier for traders to make informed decisions about their investments.

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