If you’re familiar with using bots to trade bitcoin or your favorite altcoins, then there’s a good chance you’ve heard of backtesting. But maybe you’ve only heard about it and aren’t entirely sure what it is and why you should do it.
Well, today’s your lucky day, because we’re going to do just that.
What is Backtesting?
The intention of backtesting is to apply a trading strategy to historical price data to determine how an algorithm or strategy might respond as it pertains to profits or losses for a specific asset or currency pair.
While backesting has many of the same features as “paper-trading,” you can perform iterations much quicker and over a more extended period of time. Additionally, it enables you to test your strategy during different market environments. Paper-trading cannot provide this type of functionality.
How to Backtest
While backtesting varies slightly from platform to platform, here are a few steps you can follow to get the best experience:
- Navigate to the platform to access the features of your trading bot.
- Find the “Import Data” option on the site. Often it is located toward the bottom of the page.
- Choose the exchange you want to test, along with your digital currency pair. Enter the time period you want to use to gather data. Most often, 2-3 days of data should give you the information you need.
- When the data has downloaded, select the strategy you want to use for your backtest, then run the simulation.
- Review the backtest results. Is the profitability lower or higher than the market standard?
- Repeat as needed to find the settings that offer the highest profitability. Use this information to fine-tune your trading bot before you use it live in the markets.
Why Should You Backtest?
There are many reasons to backtest, but for the sake of brevity, we’ll only touch on a few.
Increase Potential Profitability
If you’re not trading to make a profit, then you’re doing it wrong. With backtesting, you can use the data you collect as a way to increase your profitability as you move forward in your trading endeavors.
Use the input values, along with their corresponding profit estimate to optimize your profitability.
Refine Your Trading Methodology
It should come as no surprise that there are many tools that can help you determine the perfect strategy for trading bitcoin or altcoins with your crypto trading bot.
Backtesting can aid you in finding that ideal methodology by providing various exchanges, coins, and pairs from that you can choose.
Determine What Works Best for You
Backtesting is imperative when it comes to using your bot for trading bitcoin. Use backtesting to find a strategy that works best for you. You never know. You might wind up finding a whole new crypto trading strategy that you would have never through of before you started backtesting.
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