Backtesting Program

    1. What is Backtesting?
      • In backtesting, traders use past data to see how a strategy would have performed. The definition of a backtesting application is a set of technical rules applied to a set of historical price data, and the subsequent analysis of the returns that a Zerodha strategy would have generated over a specific period of time.
      • Backtesting is a type of program that allows traders to test potential trading strategies using historical data.
        The program recreates the behaviour of trades and their reaction to a Zerodha trading strategy,
        and the resulting data can then be used to measure and optimise the effectiveness of a given strategy before applying it to real market conditions. Backtesting strategies work on the assumption that trades that
        have performed successfully in the past will perform well in the future
    2. How Does a Backtester Work?

Zerodha trading strategies are applied to a set of price data, and trades are reconstructed using that data. This data can be used by traders to ascertain any unforeseen flaws in their current strategies. Alternatively, new strategies can also be tested before using them in the live markets. Depending on the type of backtesting software used in Zerodha trading, traders can get a wide range of indicators, such as:

  • Total Return on Equity (ROE): Returns, expressed in terms of percentage of the total equity invested.
  • Total Profit and Loss (P/L): Total profits and losses generated by a strategy, expressed as a percentage of the invested equity.
  • Total Gain/Loss Ratio: The ratio of how many trades resulted in gains, and how many in losses.
  • Annualised ROE: The total return likely to be generated by a Zerodha strategy over the entire calendar year.
  • Volatility: What kind of market conditions were your strategies working in, uptrends, and downtrends.
  • Risk-Adjusted Returns: Calculating your returns in relation to the risks involved in a strategy.
  • All these metrics provide you with insights about how your Zerodha trading strategies are performing.


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