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⚙️ Automated & Manual Strategy Backtesting

Strategy backtesting is an essential process for perfecting trading performance. This is a fact when implementing any manual or automated trade strategy.

♞ What is Strategy Backtesting?

Strategy backtesting involves evaluating the historical performance of a trading strategy over a specific period using a defined set of rules.

Backtesting can be performed manually or automatically. Manual backtesting can be as simple as using an Excel spreadsheet, while automated backtesting requires a trading platform and an Expert Advisor (EA).

✅ Benefits of Strategy Backtesting include:

□ Gaining a statistical edge by testing any trading strategy

□ Identifying weaknesses in a strategy and making necessary improvements

□ Assessing past performance under real market conditions

□ Enhancing system efficiency without risking capital

□ Testing a variety of parameters and setups

□ Determining the frequency of winning versus losing trades

□ Calculating the drawdown rate of different trade setups

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🧑‍🏫 Automated & Algorithmic Trading Tutorial

The Foreign Exchange market is a fully decentralized marketplace where international currencies are traded over the counter. Since there is no central authority controlling currency transactions, there is no single exchange rate for each pair. However, due to currency arbitrage, exchange rates tend to remain very close to one another. Additionally, the Forex market is extremely liquid, with daily volumes exceeding 7 trillion US dollars (BIS, 2024). This combination of a decentralized structure and vast liquidity creates an ideal environment for the development of automated trading systems.

⚙️ Automated and Systematic Trading

Automated trading refers to the process of trading global financial markets without any human intervention. It is a branch of systematic trading, meaning all automated trading systems are systematic by nature. Systematic trading assumes:

• A rules-driven trading strategy based on objectively computable inputs

• Implementation of the strategy by eliminating human emotional factors

According to Mitra, di Bartolomeo, and Banerjee (2011), automated trading can be classified into five main categories:

(i) Algorithmic Executions (the category that interests us the most)

(ii) Statistical Arbitrage (exploiting trading opportunities arising from market inefficiencies)

(iii) Predatory Trading (entering thousands of orders while expecting to execute only a small fraction)

(iv) Crossing Transactions (trading directly with another entity without exposing orders to the wider market)

(v) Electronic Liquidity Provision

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💹 Managing a Trading Portfolio

Managing a trading portfolio begins with measuring and controlling trading risk. Several tools are available to help traders assess and manage their risk. However, before introducing key portfolio management ratios, it is important to highlight three fundamental investment concepts relevant to managing any portfolio:

👉 Risk-Free Rate

The risk-free rate represents the annual return an investor can earn without taking any market risk. It is typically based on the yield of a 3-month treasury bill.

👉 Standard Deviation (SD)

Standard deviation is a statistical measure that estimates the degree of variation in a set of values.

👉 MaxDrawdown

MaxDrawdown measures the maximum historical loss of a trading portfolio in relation to its highest recorded dollar value.

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 Combining Technical with Fundamental Analysis

“If fundamentals form the brain of the market, technicals give it spirit and soul.”

Fundamental analysis examines the causes behind market movements, while technical analysis focuses on their effects. These two primary methods of analysis are used not only to explain the behavior of financial markets but also to forecast future conditions.

There are three general approaches to trading in any financial market:

• the technical approach

• the fundamental approach

• the combination of technical and fundamental analysis

As Warren Buffett said, “Price is what you pay; value is what you get.”

A fundamentalist focuses on intrinsic value, while a technician concentrates on price movement. A wise analyst considers both.

(1) FUNDAMENTAL ANALYSIS

“Nowadays people know the price of everything and the value of nothing.” -Oscar Wilde, The Picture of Dorian Gray

Fundamental analysis is entirely based on the study of economic, political, strategic, social, and other relevant factors that can influence the future demand and supply of a financial instrument.

A fundamental analyst always focuses on value, and since the relationship between value and price is indirect, fundamental analysis typically requires time for its insights to be confirmed.

The Fundamental Trader

Fundamental traders assess the market dynamics of a basket of financial assets and analyze all economic releases and other relevant information that may impact them.

More specifically:

• Current Macroeconomic Conditions in Relation to the Macroeconomic Circle
• New Economic Data (majorly Inflation, GDP, and Unemployment Rate)
• Political Risks and Social Conditions
• Interest Rates
• Other Monetary Policies
• Central Bank Interventions

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