Introduction to Backtesting the ELLIPSE Trading Strategy
The importance of backtesting
Backtesting plays a crucial role in the development of a trading algorithm. This is achieved by using historical data to reconstruct trades that would have taken place in the past using rules defined by a particular strategy. The result provides metrics to measure the effectiveness of the strategy. During development, insight is given into rule sets that may or may not be effective, resulting in an exceptional trading algorithm.
The backtesting metrics explained
Backtesting can provide a lot of valuable metrics about a given system. Some universal backtest stats include:
- Net profit or loss: Net percentage gained or lost.
- Total closed trades: Total number of trades during the back testing period.
- Percent profitable: Calculated by dividing the number of winning trades by the total number of closed trades generated by a strategy.
- Profit Factor: Profit Factor is a trading performance indicator defined as the ratio of gross profits to gross losses. A Profit Factor greater than 1.0 denotes a profitable system; a factor of 2.0 or more is good, while a factor above 3.0 is considered outstanding.
- Max Drawdown: Maximum percentage downside.
- Avg Trade: Percentage average gain and average loss.
- Avg# Bars in Trades: Average number of bars in trades.
Backtesting conditions for the ELLIPSE trading strategy
There are many factors to consider when backtesting is performed. Here is an overview of the ELLIPSE strategy backtest conditions used:
- A high Profit Factor has been prioritized over high net profit. This reduces the overall risk of the strategy.
- Testing over a long period has been performed(2014–2022), and included different types of market conditions (bear and bull market).
- Backtesting has been performed in TradingView. The backtest results can be found below the chart.
- Backtesting has been performed on the 4H time frame only, because it is a swing trading strategy.
- The ELLIPSE strategy has been developed for cryptocurrencies only. The strategy has been tested on coinmarketcap’s top 100 coins (USD pairs). It may fail to do well in other sectors.
- To keep volatility low to reduce risk, The ELLIPSE strategy has been tested without leverage with a stoploss of 12.5% for long and short.
- During backtesting, the order size for each trade has been kept the same (Non-compounding).
- Backtesting has been performed with a 0.1% commission to mimic the broker to be used when the system goes live.
- To avoid over-optimization, the strategy has also been tested on coins outside the top 100 with similar results.
- The ELLIPSE strategy is a trend following system. This strategy will not work with coins with low market cap (high volatility).
Backtesting is one of the most important aspects of developing a trading system. A better understanding of the backtest results will allow you to make an informed decision about the trading strategy to follow and which pairs to trade.
Backtesting Results
Below the backtesting results are displayed for the top 100 cryptocurrencies. For the backtesting report spreadsheet click here.
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