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 in testing the effectiveness of a trading strategy. For example, if an impending lockdown will take place in the UK in response to another Covid-19 outbreak, this will affect market prices. In this case, it is advisable to analyze the performance of certain sectors and the strategies that have given good results in the past.

Opposite to, 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 health-related stock portfolio using a particular strategy if Covid-19-related regulations continue. Various key variables such as changes in interest rates and inflation must be taken into account.

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

Clients test their strategies on paper, mock 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, step forward in time and use a market screener to filter stocks that match your level of risk.

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

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