Published on January 5th, 2021 | by Sunit Nandi


What Do You Need in Your Backtesting Software?

Backtesting takes the guesswork out of the equation when you’re day trading. It allows you to make more informed decisions and trade strategically. For this, you’d need backtesting software designed to test your trading hypothesis and confirm it.

Since there are so many options available, picking the right one can be a challenge. You need to look for certain things to narrow down. This article reveals the things you must have in your software for backtesting purposes.

Historical Market Data

The importance of data in backtesting, or in the financial market for that matter, cannot be underestimated. Many variables come into play when determining price movements. And to get a good understanding of the market, you’ll need data.

All the available backtesting applications should be judged based on their data availability. The best ones have terabytes of data that can be decades old. But you usually wouldn’t go that far if you’re day trading.

Research Tools

The backtesting application should have multiple research tools to enable fast execution of varied trading strategies. Most software packages are vectorized systems. MATLAB and Pandas are vectorized systems that you can use to test multiple strategies and a combination of them.

The backtesting environment should also support event-driven backtesting. For an event-driven approach, the system should use high-level languages like C++ and Java. These are also ideal for automated trading.

Connectivity to Different Markets

If you’re working with multiple markets, you should check the software’s connectivity to different markets. It must be designed to accept feeds from multiple markets and in different formats like TCP/IP, FIX, and Multicast.

If the software is connected to various markets, you do not have to pay for third-party data vendors like Bloomberg. These vendors source and aggregate the data for your consumption. But they come with a service fee.

Ease of Programming

Backtesting applications require some level of coding. The application needs to make the coder’s job easier and not complicated.

The best software for backtesting has a built-in IDE that allows easier code deployment and manipulation. Also, you must check what programming languages it supports. Usually, C# and Python are considered best for financial markets. They are high-level language and hence process the information faster. But the software should offer as many choices as possible.

For those with no programming knowledge, they can check if it works with Excel.

Active Trading and Latency

The backtesting software is a trading platform. And all trading platforms are created to act on real-time market information. So after you’re done with your backtesting, you can jump to real-time trading and make profits.

Ideally, the backtesting application of your choice should have advanced charts and trading tools. It should support indicators like On-balance-Volume indicator, ADX or Average Directional Index, and Moving Average Convergence Divergence. The more options there are, the better your trading experience will be.

Along with tool availability, you should also check latency. Latency is the time difference between when the exchange releases the data and its processing date at your end. This should be as small as possible.

Privacy and Security

Lastly, the backtesting platform should be highly secure. The financial market is one of the highly targeted areas for hackers. Therefore, you wouldn’t want to have your sensitive information leaked or stolen.

Check for SSL certificates and security status to ensure you’re backtesting at a safe place. When it comes to privacy, make sure the software doesn’t sell your data to third-party vendors without your consent.

With backtesting, you reduce the risk and not eliminate it. Therefore, traders must adopt responsible trading methodologies and risk adjustment. Backtesting software makes your life easier as a trader.

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I'm the leader of Techno FAQ. Also an engineering college student with immense interest in science and technology. Other interests include literature, coin collecting, gardening and photography. Always wish to live life like there's no tomorrow.

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