The Power of Historical Data & Backtesting Your Investment Portfolio


Over 60 to 75% of the American stock market’s overall trading volume is algorithmic. More and more traders are leveraging the power of computer-generated trading strategies to achieve accuracy and success.

If you’re looking to enhance your trading practice by using automation, one such way is to use historical data and backtesting. They help you test strategies before without risking their capital based on the previously collected information. 

Let’s take a deeper look at how traders can benefit from the use of historical data and backtesting in their strategies to create strong investment portfolios, eliminate uncertainties, and find success

The power of historical data and backtesting your investment portfolio

Backtesting refers to applying a trading strategy that is based on a predictive model created by the use of historical data to determine its accuracy. The purpose of backtesting is to test out different strategies without risking capital on them. 

Once a trader devises the strategy, they calculate how it would work in the current market based on historical data. It helps them understand how it would perform currently. They can then work on how it can be tweaked for the most optimal results. 

Once the trader has perfected a strategy through backtesting and historical data, they can move forward with it and successfully implement it. They’re far more likely to find success this way as this approach is backed by data and factors in risks and uncertainties of the market

1. Helps you perfect a strategy with no risk 

One of the most important aspects of backtesting with historical data is the value it offers a trader by allowing them to test the strategies with no risk. Without backtesting, traders are often left to their own devices to figure out how well a strategy would perform. 

With the use of backtesting, a trader can essentially test-run a strategy by creating a simulation of how it would perform in the real market with the use of historical data. If the results are not as expected, you don’t lose any capital. 

Moreover, you can go back and tweak the strategy as much as you want until you reach the desired result. You can perform this exercise for any commodity, be it stocks, CFDs, or ETFs. Here is a comprehensive guide to top ETFs to help you devise some strategies. 

Build, test, and execute your trading strategies with tools, real-time market data, and advanced chatting to ace the market. It helps you build an impressive investment portfolio of diverse assets.

Backtesting allows you to find strategies that fit your trading style and budget. You can experiment around to see what works and what doesn’t until you land on the perfect one. After that, automation takes over and you can simply relax. 

2. Helps you ace automation 

Backtesting lets you successfully automate your trading practices. This may seem counterintuitive because backtesting involves meticulous trial and error of different versions of the same strategy. However, automation can be easily used in this. 

First, you can use automation to test our different strategies. It doesn’t have to be a manual process at all. Trading platforms these days specifically provide you with tools to backtest various strategies, making it a quick and simple process

When you can test out strategies in minutes, it incentivizes you to test more and more strategies and ideas. Secondly, once you’ve landed on the perfect course for a particular strategy, you can simply run it on autoplay and sit back and relax.

The automation takes care of the rest while you reap the rewards of the perfect strategies you’ve crafted. As we talked about above, around 70% of trading in the American stock market is conducted through automation. 

Most traders are already relying on automation to execute their plans. But when you add backtesting backed by historical data to the already efficient automation, you make it a much stronger vehicle for achieving success in the market. 

3. The bigger the historical data set, the better your strategies will be 

An aspect traders often overlook when it comes to backtesting through historical data is the size of the data they use. The size of the historical data set you use for backtesting quite literally determines its accuracy and success rate

If the data set you use is limited, say it only has 1000 previous entries of a time period, the strategy backtesting will only use those 1000 entries as a base for its performance. This isn’t accurate as in the real market where hundreds and thousands of transactions are taking place at once.

1000 entries is a very low sample size that doesn’t reflect the true market. You need a large and relevant data set to be able to derive accurate results. Focus on expanding your database by collecting relevant market data from time to time. It helps you improve your processing as well. 

To collect more data, take a look at the platform you use to trade. Assess its libraries and database and check if they have large and varied sets of data that reflect the actual market accurately. Even a relatively lower sample size can work if it’s varied.

Additionally, you might look for external sources of historical data. Platforms such as Yahoo Finance and Investopedia offer vast and comprehensive sources of historical data for all sorts of commodities. Integrate them with your trading platform for seamless backtesting.

4. Removes bias

One of the major benefits of using automation in any process is the removal of conscious and unconscious bias toward any aspect of the process. It leads to methodical performance and unbiased results that most people can find value in.

Backtesting and historical data take it a step forward by injecting accuracy and adding a solid foundation to automated trading. Traders can feel confident in their strategies when they’re backed by thorough testing and a varied data set. 

It helps them remove their conscious and unconscious bias about aspects of their strategies or of the market. Many investors tend to make decisions out of panic or on impulse in hopes of bigger gains on their trades.

This can lead to heavy losses if they take a misstep while guided by their emotions. Backtesting removes this entirely from trading operations by allowing traders to make decisions on evidence and data.

This way, even if a strategy takes time to yield results, a trader will not panic as they know they’re on course for turning profits and that negotiating market ups and downs is part of the process as well as important.

5. Saves you time

This may seem counterintuitive to say that thorough backtesting saves you time. After all, the process is about spending extensive time and effort crafting a strategy before you go ‘live’ with it. However, in the long run, it absolutely does save you time.

Think of it as a project. The more time you spend in pre-production, the easier the actual execution becomes. Pre-production already has you planning what you need for the project, how to procure it, procure the items needed, and calculating how it will fit your budget and how long it will take for you to complete it.

Pre-production arms you so well for executing the project that by the time you reach the execution stage, all you have to do is perform tasks as already decided. So, you don’t waste time procuring items or wondering how they will fit your budget.

You simply put the already procured items to use and complete the task with perfection. Similarly, backtesting is the pre-production that arms you for the actual market. You can test as many strategies as you want and hone them to perfection.

The time you spend during backtesting eventually pays off when you go live with them. With automation, you can essentially run strategies on auto-pilot. This way, you save time running only the strategies that bring you profit.

6. Excellent for beginners

Backtesting is an excellent tool for beginners. Most novice traders are reluctant to step into the market as the risk of losing their capital runs high. Backtesting allows them to understand the intricacies of the market without taking any risks.

They can falsify and confirm ideas before going live with them. And when they’re sure about their strategies, they can perform actual trades with them. As a beginner, you should still start small, but backtesting gives you the confidence to trade the way you want.

This is because you know your strategy is backed by data and trial and error. The trade you’re currently performing is the most perfect version of it and will yield you profits in the long run. You may also take the help of experts or guides to learn more about backtesting.

Backtesting and historical data back your strategies to find success with ease

Backtesting with the use of historical data is one of the most efficient ways to perfect your trading strategies to achieve success in your trading. It helps you plan your strategies, tweak them and run them through automation.

It not only helps you perfect your strategies but also makes good use of automation technologies to your benefit. Make sure to use a large data set to ensure better accuracy. It has emerged as a great strategy for beginners to understand the market before entering it.

Let us know in the comments how you think backtesting helps traders improve their portfolios.


Author bio: Atreyee Chowdhury is a freelance content writer with more than 10+ years of professional experience. She’s passionate about helping SMBs and enterprises achieve their content marketing goals with her carefully crafted and compelling content. She loves to read, travel, and experiment with different cuisines in her free time. You can follow her on LinkedIn.