Back Testing is the act of applying your investment strategy to historical data/market trends to test its viability.
What is Backtesting?
Despite what the people at WallStreetBets have to say on the matter, a good investment strategy is about patience, planning, and research.
Markets often repeat themselves when expressed under similar conditions Supply, demand, and other factors are all measurable phenomena that repeat themselves under the right circumstances. So it stands to reason that if you can understand how these things work, then you can apply them to future conditions and make a profit.
In essence, you have to create a hypothesis, test it, and then apply it.
Backtesting is the act of testing that hypothesis against previous market conditions, and while it isn’t an exact science, it can be extremely useful.
How does it Work?
The first thing you need to back-test is market data, and the more, the better.
There are all kinds of places you can go to get insightful levels of historical data. In the world of crypto and for specific coins, CoinMarketCap is a fantastic place to start.
You also need to have a trading system that you are testing.
Different traders employ different strategies, but you’ll likely find things like arbitrage trading, dollar-cost averaging, and range trading, just to name a few.
Next, you’ll have to find a platform that supports backtesting. Places like Binance, TradeWell, and AlTrady are good places to start.
Then input the data, set the time parameters, and find out if your strategy could have made you some profits and why.
Why Back Test?
Investment is not an exact science per se, but it is very close to being one. Wise investment requires education, research, a decent understanding of math, and the ability to apply it.
Simply throwing money at projects due to hype and FOMO is how people lose money and is not advisable. So instead, do your research, apply backtesting, and get the most out of your crypto investments.