What Are the Best Backtesting Strategies for Daily Traders?

For something so foundational, you need to put in more effort. Using bug-free backtesting software and trading strategies to backtest are the right steps to take. Here are some essential backtesting strategies for traders.

Prerequisites to Backtesting for Daily Traders

Backtesting as a trading strategy can be intimidating, especially to newcomers. This is because you may have even not landed on a strategy, so you have first to figure out what to test.

To get started, you’d require software that is capable of backtesting with all the historical data of the asset you’re trading.

After you’ve settled on software, you need to find an instrument. Since you’re day trading, you need to select tools that are highly liquid and volatile. This would allow you to get in and out of the market real quick. Forex and commodity futures are usually the best options.

If you already have the above mapped out, you can proceed with the following trading strategies for backtesting.

Momentum Trading

Momentum trading is excellent for day trading, with the assets moving as many as 20-30% in a single day. Since they are either in an upward or downward trend, they’re pretty much safe to trade.

Usually, you can look at the chart and tell whether the asset is in an uptrend or downtrend, but it’s best to backtest this strategy and confirm the entry and exit points. This way, you’d know if the trend is about to change and reverse. Based on the market’s momentum, you can hold the positions from a few minutes to the entire day.

Reversal Trading

Reversal trading is highly debated among traders because of the risk involved. It goes against the convention and asks you to trade against the trend. While there is a risk, the reward is also there for short-form day trading. You can make a profit within a few minutes or hours. Usually, whole day trading is not ideal with a reversal trading strategy.

To make the trading as safe as possible, you must backtest to check the reversal’s viability. You can spot things like Keltner Channel, Envelopes, Daily Pivot, among others. If the instrument goes to the extremes, it might be a good entry point for reversal trading. Backtesting will help you spot these with accuracy.

Range Trading

If you’re considering range trading, then backtesting is a must. Because ranges exist for a short period, usually minutes, you must spot them early to make a profit. Once you identify a range, profiting from them is easy and usually involves little to no risk.

In range trading, the asset or currency pair oscillates between a support and resistance level. Traders need to find the two levels and place either a buy entry or a sell entry. With backtesting, you’d be able to spot the support and resistance level accurately. It would make your trades much safer.

Breakout Trading

Breakout trading is the most commonly adopted trading strategy by day traders. A breakout occurs if the price breaks a range and either goes in an uptrend or downtrend. This is because the trade volume increases and becomes volatile.

If it’s an uptrend, then traders can safely enter into a long position. If it’s a downtrend, then entering a short position is critical. With backtesting, you’d be able to get these crucial breakout positions. You can also combine the breakout trading strategy with range trading to better understand the market movements.

A backtesting software will help you to test any of the above day trading strategies. Historical data is the key, and you should look at how much data the software offers.