Backtesting, if used correctly, is a powerful tool to help evaluate trading strategies. However, as with any tool, it has limitations. As a silent observer over the past few months, we’ve witnessed people pile into now crowded strategies after backtesting them (ehm the #920Straddle and its variations). Some people made money. Others didn’t. Some lost a lot with the so called #freaktrades. Our purpose here is to explain the benefits and limitations of backtesting trading strategies in India as we understand them, while also making backtesting accessible to everyone interested.

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The Importance of Backtest Trading Strategies Free India | AlgoTest India

In Zerodha, the 9.15am candle refers to the time covering 9:15:00-9:15:59. How does AlgoTest define this candle? In AlgoTest, this timespan refers to the 9.16 candle. So when we say 9:54am, the price you see on AlgoTest was Rs. 617.95, which corresponds to the close price of the 9:53 candle on Zerodha, which was Rs. 620, a lot closer to the price you see on AlgoTest!

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How does AlgoTest define a candle?

In the world of backtests, we represent a constant flow of market data that your broker API receives as candles. A candle has the wonderful property of compressing all market activity over any period into 5 distinct data points – open, high, low, close and volume. With the benefit of this compression, however, comes a cost. The cost is loss of data. Once you go from 1-second granular LTP data to a 1-min candle, you’ve essentially distilled 60 price data points into 4.

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Why Is the Backtest Loss Higher Than My Stop Loss?

Once you’ve discovered some profitable strategies (click here to see an example), the next step is to combine them in a portfolio.
To build a portfolio, click on Portfolio, then “Create new portfolio”. You can select the strategies you want to include in your portfolio, and finally, give your portfolio a name. On clicking “Create”, your portfolio will now be ready.

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Backtest Multiple Strategies Together Using the Portfolio Feature | AlgoTest India

Let’s say we are short a 920straddle with a stop loss on each leg at 20%, and “Square off: Partial” selected. A large market move in one direction will lead to one leg’s SL being hit. In this scenario, we will only exit that leg and continue to hold the position of the other leg. For example – if my call and put entry prices were both Rs 100, then my SL for each leg is Rs 120. Most likely the call SL will get hit first if the market goes up first. In this scenario, the put will continue to be in the market, with its stop-loss unchanged at Rs 120. A similar scenario unfolds if the market goes down first, in which case your put SL will be hit while the call stays in the market.

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Trail Stop Loss to Break-Even Price when Backtesting

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