Backtesting Portfolio Strategies
Tools for traders
A look into portfolio backtesting and the features Tradewell offers
Portfolio backtesting is a way to test how well an investment strategy would have worked in the past. The process can help you understand how risky a portfolio strategy is and whether it is worth investing in.
But arguably the most important reason to backtest is learn what allocation rules and strategies to toggle on and off depending on market regime. For example, you might find that a given strategy works well in bull markets but not in bear markets.
There are a number of ways that portfolio backtesting advantages investment managers who incorporate it into their process:
Backtesting can help you determine the strength and flexibility of your strategy, specifically as it pertains to its suitability across different markets.
Backtesting a trading strategy on a diverse portfolio can help you select the best instruments for that particular strategy.
Testing a strategy on different types of investments can help you find any problems with the strategy. This also helps to avoid committing to a strategy that's too good to be true.
There are two main ways to test a portfolio strategy:
1. Backtesting with code
Some investors choose to write their own algorithms to backtest their portfolios. They often use a programming language called Python to do this. This language is easy to learn and there are many libraries that can be used to develop backtesting systems.
2. Backtesting tools that automate the process
If you're not a programmer, it can be hard to write code to test your portfolio management strategies. However, you can use software tools that will help you write the code for you. This will automate the backtesting process, so you won't have to write any code yourself.
Professional money managers that backtest their portfolio strategies often rely on tools that have these features:
Flexible strategy logic
Good portfolio backtesting software will do a lot more than just run a set of individual trading strategies. It will also take into account position sizing, setting capital limits, and rebalancing the portfolio at regular intervals, as well as determine the priority of new orders.
Accurate historical price data
If you want to test a portfolio strategy, you will need accurate historical price data for the instruments you plan to test. Without accurate price data, your backtesting results will not be accurate and will not help you make good decisions about your trading.
Rich analytics to help you optimize your strategy
Analytics help you look at how different portfolios have done in the past. Portfolio managers can look at risk characteristics, style exposures, and drawdowns. These metrics can also help you see how specific components within the portfolio contributed to losses or gains.
There are a few reasons why Tradewell is a great choice for backtesting stock trading strategies:
Thousands of Instruments
The Tradewell platform features over 65,000 tickers, including US Equities, ETFs, Mutual Funds, Chinese A-Shares and commodities.
Flexible Rebalancing Logic
You can also use calendar-based rebalancing to reset your portfolio allocations every month, every three months, or every six months. You can also set a rebalancing band that will tell you when your portfolio is deviating from your target allocation by more than 5% (absolute) or 25% (relative).
With Tradewell, it is easy to backtest different portfolio strategies. You don't need to know how to code in order to use it. Just select the instruments and allocation rules you want to study, and Tradewell will do the rest. This saves you time, and makes it easier for you to experiment with new portfolio management ideas.
Tradewell features a range of performance analytics that reveal how well your portfolio performs over time. This includes the final balance, the average growth rate (CAGR), and the internal rate of return (IRR). You can also see how risky your portfolio is (standard deviation, Sharpe ratio, Sortino ratio, and maximum drawdown).
Free to Get Started
The Tradewell platform is free for any trader to use. There are no upfront costs or commitments. Traders can start backtesting their strategies immediately.