Comparing Manual and Computer Backtesting: Benefits and Disadvantages for Retail Traders
Backtesting strategies is an essential part of trading, and the most successful traders will always backtest before making a trading decision. Traders use backtesting to evaluate the effectiveness of a particular strategy, and there are two main methods for doing so: manually backtesting and backtesting with a computer - i.e. writing a computer program to backtest your trading strategy. In this blog post, we'll take a closer look at the advantages and disadvantages of both approaches to backtesting, so you can decide which method is best for you.
Manual Backtesting
Manual backtesting requires the trader to manually assess the performance of a particular strategy over a given period of time. This method of backtesting is usually done by looking at the historical price data on your brokers trading platform and recording the strategy signals in a spreadsheet, to see how it would have performed. The advantage of manual backtesting is that it is very simple to do and doesn't require any technical knowledge or skill.
Another advantage of manual backtesting is that it allows traders to observe each trade signal on the chart. This allows traders to gain a more in-depth understanding of their strategies, as they can see how each individual trade signal plays out and what the results were. This is in contrast to computer backtesting, which only shows the final results of the backtest. By manually backtesting, traders can gain a better understanding of their strategies and learn more about how their strategies may perform in the future. This can be a great advantage for traders who want to gain a deeper understanding of their strategies and become more successful traders by improving their trading strategies.
However, manual backtesting is very time-consuming and can be prone to errors. One of the major issues with manual backtesting is the potential for bias. When manually backtesting a strategy, traders may be tempted to look for patterns that fit their own ideas or preconceived notions. This type of bias can lead to inaccurate results and can make it difficult to get an accurate assessment of the performance of a strategy. To avoid this type of bias, it's important to be objective when manually backtesting a strategy and to not be swayed by any preconceived notions.
Also, manual backtesting relies on a limited amount of data, making it difficult to get an accurate representation of a strategy's performance. While traders often manually backtest their strategy over a period of 100 days or 100 trade signals, this is not enough data to get an accurate picture. As shown in the strategy win rate chart below, the accuracy of trade signals can vary drastically in any 100 trade period, and may not reflect the true accuracy of the strategy when looking at a larger sample size of multiple years or thousands of trade signals.
Win rate chart for a trading strategy showing an average win rate for the strategy on 10 years of data and the win rate for the last 100 signals.
Advantages
Simple to do.
No technical skill is required.
Can learn strategy nuances by observing each signal on a chart.
It’s free.
Disadvantages
Very time-consuming.
Prone to errors.
Subject to preconceived ideas.
Not enough data to get an accurate picture of the strategy.
Backtesting with a Computer
Backtesting with a computer is a much more efficient and reliable method of backtesting a trading strategy. This method requires the trader to convert thier trading strategy into a code and use specialized software that can quickly analyze the performance of a strategy over a given period of time with a large sample of data. This method of backtesting is much faster than manual backtesting and can provide a much more accurate assessment of a strategy's performance. One of the major advantages of backtesting with a computer is that it allows traders to optimize their trading strategies for the best parameters. With computer backtesting, traders can quickly and accurately assess how different parameters affect the performance of a strategy.
Best and worst trading paramaters for trading strategy.
Strategies optimisation profile done with DARA software.
The downside of backtesting with a computer is that it requires a certain level of technical knowledge and skill to understand and use the software. Specifically, traders will need to know how to code their trading strategy in order to backtest it with a computer. This can be a challenge for traders who are new to coding or don't have the necessary technical knowledge and skill. Additionally, backtesting with a computer requires backtesting software and historical data which can be costly. This can be a barrier for traders who don't have the resources to invest in the software.
As mentioned before, one of the disadvantages of backtesting with a computer is that it can make it difficult for traders to learn the details of their strategies. Computer backtesting will typically only show the final statistics for a strategy, without providing any insight into the individual trade signals or decisions that contributed to the overall results. This can be a disadvantage for traders who want to gain a deeper understanding of their strategies and become more successful traders. To get the most out of backtesting, traders may want to consider incorporating both manual and computer backtesting into their trading routine.
Advantages
Get to know your strategy results across many years very fast.
Get to know your strategy results across many markets very fast.
Optimize your strategy for the best parameters, best markets to trade, best stop loss and take profit placements.
Is objective and will take all the signals when strategy rules are met.
Disadvantages
Requires coding knowledge.
Requires obtaining historical data and backtesting software which can get expensive.
By looking only at the final strategy results strategy signal characteristics can be missed.
Here are some of the best-known backtesting platforms with options to purchase historical data.
Ninjatrader - https://ninjatrader.com/
Tradingview - https://www.tradingview.com/
MQL5 - https://www.mql5.com/
3rd option - No-code computer backtesting!
In addition to manual and computer backtesting, traders can also take advantage of no-code computer backtesting. This method offers all the advantages of computer backtesting, such as the ability to backtest strategies on a large amount of data quickly, as well as the ability to optimize the strategy for the best parameters.
What sets no-code computer backtesting apart is that it requires no programming knowledge, as the strategy creation is done using predefined bot templates and traders simply select the options they want to use. DARA app is an example of such software, and it also allows traders to view each strategy signal on a chart from the backtest, so they can gain a deeper understanding of their strategies.
Traders can view each strategy signal on a chart from the backtest, so they can gain a deeper understanding of their strategies.
Advantages of No-code backtesting
No-coding required.
Backtesting software and historical data is included.
Get to know your strategy results across many years very fast.
Get to know your strategy results across many markets very fast.
Optimize your strategy for the best parameters, best markets to trade, best stop loss and take profit placements.
Is objective and will take all the signals when strategy rules are met.
Disadvantages
Does require sharing your trading strategy with developers who will create your bot template.
Can be out of budget for beginner traders but is still cheaper than purchasing backtesting software, historical data, and paying a developer to code up your trading strategy.
Which Method Is Right for You?
When deciding which method of backtesting is best for you - manual, computer, or no-code - it is important to consider your own level of technical knowledge, trading experience, and budget. For traders who are new to trading and don't have a lot of technical knowledge or skill, manual backtesting may be the most suitable option. On the other hand, those with a strong technical background and/or development experience may prefer to code up their strategies and use computer backtesting. For all other traders, no-code backtesting would likely be the best option. With no-code backtesting software, traders can reap the benefits of an algorithm trader without needing to code the strategy themselves. Whichever method you choose, it's important to remember that backtesting is an essential part of trading, and the most successful traders will always backtest before making a trading decision.
Want to see if No-code backtesting is for you?
Book a demo call with DARA team below.
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