Sourabh Sisodiya, CFA
@sourabhsiso19
13 Tweets • 2021-11-18 16:22:37 UTC • See on Twitter
rattibha.com
How to build/backtest a strategy ?
1) Idea/Hypothesis
2) Specify entry,exit, SL & position size
3) Generate trade log & Backtest Report
4) Test in diff. market condn.
5)Optimise the strategy
6) Evalute the robustness & stress testing
7) Track Real Time performance
8) Deploy
1) Idea( Eg. Theta Eating Strategy)
Options decay with passage of time.
I look at the theta decay curve & wonder that
some decay is intraday and some is overnight.
Can I capture the intraday theta decay by creating
delta neutral positions ?
#idea #theta
2) Entry, Exit, SL & position size
Can we create intraday straddle to capture theta
decay ?
Initial Logic :
Entry : Create straddle at 9:20 am
Exit : Close the straddle at 3:15 pm
SL : 10% of combined option premium
Position Size : 1 lot (CE & PE) per 2 lakh
3)Generate trade log & basic backtest report
The trade log contains all trades as per your trading
logic.
Also plot the equity curve(cumulative P&L )
& certain backtesting metrics to see if the
results are decent.
If yes then proceed further else discard the strategy.
4) Generate a detailed backtest report & test
across different market conditions.
Look for metrics such as-
Outlier adjusted performance
Max drawdown & Time drawdowm
Profit factor
Model efficiency etc to decide whether the systems
fits your psychology.
5) Optimise :
If the basic results look good, dig deeper.
-What if we exit at pre-defined profit instead of 3:15
pm ?
- Days suitable for the strategy ?
-Days when you should avoid the strategy ?
- High vix or low vix ?
Basically generate more insights.
6) Robustness & Stress Test
Check performance on black swan days
Check performance by removing outliers &
max
Are trades evenly distributed ?
Consistent performance qtr by qtr, year by year,
Even dist. Of PnL ?
Also do walk forward testing.(Advanced topic so
will explain later)
7) Track Real Time Performance
Start live execution with small qty before actualy
deployment to get feel of the strategy.
Try to incorporate the feedback from live execution
to further improve the strategy.
8) Deploy :
if the strategy passes all above steps then it’s fit for
live deployment.
Deploy the strategty and monitor the real time
performance.
The live performance should be similar to the
backtest results.
9) Other important points
Make sure you avoid the following backtesting
pitfalls and clean the data before backtesting.
-survivor ship bias
-look ahead bias
-in sample bias
Also include slippages,brokerage for true picture of
the strategy
10) As a rule if you backtest for n months , you can
trade for n/3 months.
And you need to assess your strategy from time to
time bcz as market conditions keep changing your
strategy may stop working.
How do you know your strategy has stopped
working ? Think over it.
11) Resources :
Trading Systems by Emillo Tomasini is a good book
to get started & learn how to build a trading
system
Also one can start learning basic python for data
analysis & backtesting
https://www.udemy.com/course/python-for-
finance-and-trading-
algorithms/learn/lecture/7155466#content
12) I hope you found the thread insighful.
I truly believe that small data insights can bring
significant improvement in your trading
Start learning basic coding & data analysis
online.
It’s not difficult, trust me. Just get started
End
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