One thing is clear in trading: your strategy needs an edge in the market. The easiest way to find out whether your strategy can make money is to validate it on historical data. This article will teach you how to backtest a trading strategy and what to consider when using a backtesting platform.

What is Backtesting?

Backtesting is an easy way to ascertain the viability of a trading strategy by checking how it performs on historical data. If a strategy performs well in backtesting, it shows that it will likely do well in live trading, giving you the confidence to try it out.

In terms of backtesting definition, it is the process of simulating a trading strategy on the historical price action of a given market. It involves using a backtesting software to replay historical price action so that you can trade the strategy as though it is a live market. In most cases, you also get analytics on the results of the strategy or you can even visualize performance on a chart.

What are the Advantages of Backtesting a Trading Strategy?

Some of the advantages of backtesting a trading strategy include:

  • It allows you to validate your trading system on historical data and different market conditions;
  • You get the analytics on how the system/strategy worked in the market;
  • With those analytics, you can make objective decisions about the strategy so you don’t overestimate its profitability. In this way you’ll avoid risking your hard-earned money on a system that is doomed to fail;
  • Backtesting offers you a basis for optimizing the parameters of your strategy;
  • You can invalidate very fast wrong assumptions;
  • You can test new indicators in just a few seconds without committing real money;

What are the Limitations of Backtesting a Trading Strategy?

Backtesting is great, but it also comes with pitfalls. See below some of the limitations:

  • Slippages and delayed order executions may not be taken into account and those factors can affect profitability in the real market setting;
  • You need to make sure that trading fees and commissions are included in the overall profitability of the strategy;
  • Backtesting alone does not test for the robustness of the trading strategy — a strategy that performed well on backtesting may not perform well in live trading, because the market condition has significantly changed from what it was in the past;

What is a Backtesting Software?

A backtesting software is a web platform or an application that allows you to backtest your trading strategy. It can be a trading platform that has the capacity to replay historical price action along with the readings of any technical indicators so that your strategy can be implemented as though it was in real-time.

There are many free backtesting software options out there that you can use. Yet, those free ones may not offer you everything you need. They usually don’t have enough data and may limit you to a few indicators.

However, there are some good third-party backtesting software that have many built-in technical indicators and drawing tools. These paid ones normally track the most important analytics you need for evaluating the performance of your strategy. Most of them also account for some of the pitfalls like slippages or fees and offer you a robust approach to validate your trading strategies.

The best backtesting software should be simple to use and easy to set up (as it is cloud-based and needs no infrastructure), with enough historical data that is available in multiple timeframes.

How to Backtest a Trading Strategy?

There are certain steps to follow when backtesting trading strategies. While they may vary depending on the nature of trading strategies, these are the key steps to follow:

Step 1: Convert your trading strategy to a trading system

To easily backtest your strategy, you need to convert it to a trading system by writing out the criteria for the various components of your trading system.

Depending on whether you plan to trade in one direction (long-only) or both directions, your trading system should have the following components:

  • Entry conditions: the criteria for entering a position. It can have as inputs technical indicators, time-based decisions, portfolio balance or any other factor the trader considers relevant for entering the market.
  • Exit conditions: the criteria for exiting a position. Besides the inputs mentioned above, the exit condition can also include some safeties like take profit, stop loss, trailing stop loss etc.
Step 2: Specify the market and the timeframe you want to test the strategy on

Your strategy should be tested for the market you want to trade it in. A strategy that works on S&P 500 Index may not work on gold, while the one that works on gold may not work on Bitcoin. Also, some strategies can be used on the daily candles, while others turn out to be more profitable on intraday levels like 1 minute or 5 minutes.

Step 3: Specify the historical period where you want to test the system

Even if you don’t plan to spare a part of the historical data for walk forward optimization, you need to state the length of your testing period. It’s wise to choose multiple periods with different market conditions.

Step 4: Implement your trading system on the historical price action

Set your backtesting software to replay the historical price action and execute the strategy you want to test. Then follow how your conditions are met for entry and exit.

Step 5: Evaluate results and iterate on your strategy

If you got it from strike 1, then lucky you. But most of the time you need multiple iterations. Don’t lose faith – try again with different inputs and fine-tune your strategy.


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How to Evaluate Your Backtesting Results

These are the major performance statistics you must check when evaluating your backtesting results to determine the sustainability of the strategy:

  • Number of trades: This tells you whether the results can be repeatable. The lower the number of trades analyzed in backtesting, the less reliable the result.
  • Profit factor: This is the total profit divided by the total loss (including commissions) for the entire trading period. It indicates the amount of profit per unit of risk. A profit factor of more than 1 indicates a profitable system.
  • Average holding time: This is the average length of time that a position was opened in the market. 
  • Comparison with Buy and Hold: This shows you how the results of the strategy compare to the passive investing method of buying the asset and holding it all through the backtested period.
  • Maximum drawdown: This is the difference between the higher amount and lowest amount your capital reached during the backtesting. A high drawdown is a bad sign. 
  • Volatility: This shows how your returns fluctuate. The less the volatility, the more suitable the strategy is for that market.

Other statistics to monitor include:

  • Profit per trade
  • Profit per month
  • Win rate
  • Sharpe ratio

Final Words

We learned how to backtest a trading strategy. You can use backtesting as an easy way to ascertain whether a trading strategy can make money by checking how it performs on historical data. Join Vestinda and make sure you add this step in crafting your strategies.

Traders who stick to a well-thought-out investment strategy have an edge over the ones that do not. So let’s see how to create the best crypto trading strategy for you.

Strategies allow you to make more educated decisions by analyzing a lot of data. Hence, gaining maximum out of your investments. Strategies will vary from trader to trader, depending on personal risk tolerance as well as financial goals, however, it is an essential part of navigating the market.

Investing in crypto assets without a trading strategy is like jumping in the ocean without learning how to swim first. 

What Are Crypto Trading Strategies?

Crypto assets are by far one of those investments that have the highest risk associated with them. Trading them without a plan is risky and has the potential of leading to a loss of invested capital. 

A crypto trading strategy means following a plan when you engage in the process of buying or selling different crypto tokens. It is a system based on predefined rules and criteria which are used when making trading decisions.

Factors to Take into Consideration When Creating Your Crypto Trading Strategy

In order to turn your strategy into a profitable one, you need to mind the following:

  • liquidity – On a market with good trading volumes, the spread between BID and ASK will always be lower. You need to account for large spreads when building your entry and exit rules. Take profit and stop loss should also be set accordingly. 
  • trading pairs – A strategy that works on Gold may not work on Bitcoin. Make sure you backtest on the asset that you want to trade.
  • market volatility – There are different types of trading strategies. Some work great following the trend, others are more suitable for sideways movement of the market, while others can capture the most value from big price changes. Use the right tools to identify the market you’re trading in.

Steps to Create the Best Crypto Trading Strategy

Step 1: Research

Before even investing a dime within a crypto asset, the first thing you will need to do is due diligence and research on the projects you are interested in. While Bitcoin and Ethereum are largely dominant on the market, make sure you do research on as many alternative crypto assets, known as altcoins out there.

Investing in a crypto project without learning what it is about is like traveling to a foreign country without learning its navigational layout or bringing a GPS – you can get lost easily.

For example, there are alts out there that contribute to the changes in the real world, while others contribute to on-chain performance, or serve as a governance token for the future of specific projects where the more tokens users hold, the more power they have. 

Step 2: Set Risk Levels & Goals

Make sure that you develop a common understanding of risk across multiple crypto assets so you can manage a strategy that is cost-effective when it comes to the risk involved in it. You also need to achieve a better understanding of the risk in order to get a competitive advantage. Here you will also need to build safeguards and learn how to respond effectively to crucial risks.  

Step 3: Choose Your Asset

After you have done your due diligence, and have set your specific risk levels and goals, it is now time to pick the crypto asset that you will be investing in. 

The interesting thing to note here is the fact that you do not have to limit yourself to a single crypto asset. It is recommended that you branch out into multiple crypto assets to diversify. Also, you never quite know when one can spike up in value tremendously. 

Step 4: Choose a tick interval for your strategy

You have to read the charts using different tick intervals to follow price actions and identify patterns. Use technical analysis to your advantage and adjust strategy when the market conditions change. Use time frames such as 3 minutes, 5 minutes, 15 minutes, 1 hour, 4 hours, or 1 day to better choose your entry and exit moments.

Step 5: Choose entry & exit rules

The entry point is the price at which you will decide to buy a crypto asset, while an exit point is a level at which you will sell. You can choose to build your entry and exit conditions by using technical analysis patterns, on-chain data intelligence. The sentiment of the market can also play a major role in the decision-making process.

Step 6: Backtest your assumptions

Backtesting is this general method through which you can see how well a strategy or a model has done; ex-post. This will help you assess the viability of a trading strategy and see how it would have played out on historical data of the crypto token in question. If this works, you will have the added confidence of using it going forward.

Step 7: Analyze results

Another key aspect of forming a good investment strategy is to evaluate it in order to predict its future performance and determine its sustainability. When you analyze the results efficiently, you can assess the financial strategy or create a new one based on the performance of the previous investment. Look at specific statistics that can help you understand how well the strategy performed (sharpe ratio, alpha, holding time, maximum drawdown etc.)

Step 8: Revise strategy

You have to adjust the conditions, as well as the risk levels, safeties, and other inputs based on how the market evolves throughout time. Keep updating your strategy to get the best possible outcome.

Tips to Improve Your Crypto Trading Strategy


  • Stop-loss: A stop-loss is a type of protection that helps you manage risk, so you do not end up losing more than you wanted to. If the price of the asset moves against you with the percentage set, the Strategy will EXIT.
  • Take-profit: Obviously, it is a way to close a position at a profit. If the price of the asset moves into your favor with the percentage set, the Strategy will EXIT.
  • Trailing stop loss: The Trailing Stop Loss functionality works similar to the Stop Loss, only that it trails the price change if the price moves in your favor. Then, if the price changes direction against you with the percentage set, the Strategy will EXIT.

By taking advantage of all of these safeties you can improve efficiency. Plus it gives more peace of mind and helps you create the best crypto trading strategy for you.

Try Not to Risk More Than X% Out of Your Portfolio

Each position and investment that you make should not risk more than X% of your entire portfolio. This will typically be in the 2% range, but it can vary based on asset fundamentals and the entry signal’s strength. The position size refers to how much you can put into a specific crypto asset. For finding the appropriate sizing, you should consider your risk tolerance level, as well as the size of your account. 

Keep an eye on your entire portfolio

Track your crypto portfolio and make sure you have an overview of your net worth. It can give you a hint on how to size your positions, whether you are exposed to much or staying in cash, or how much of your portfolio is in different assets.

What Tools You Need to Create the Best Crypto Trading Strategy?

There are many tools out there available to help you in the creation of your crypto trading strategies. However, there are a few things you need to keep in mind before picking the right one: 

  • It needs to be flexible and easy to understand as well as use. 
  • You need to analyze how much data is available inside the platform and what kind of options you have when it comes to using them together. 
  • Check if you require any programming skills or not in order to use it.
  • The tool needs to give you various functionalities, such as backtesting on historical data, paper trading or live trading.
  • You should receive advanced analytics on the strategy results, that will help you make an educated decision going forward.
  • You should be able to see your investments easily after you start a strategy and see the results in a simple way.

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Why Choose Vestinda to Create Your Crypto Trading Strategies?

Vestinda empowers your investments in digital assets. You can build trading strategies that you can use to automate the entire investment process.

It offers you all of the aforementioned features, and you can even invent unique algorithms with the easy-to-use, rich and flexible drag and drop strategy builder.


See the main reasons you should try our strategy builder:

  • You can use close to 100 technical indicators
  • Different tick intervals can be used in the same strategy for each indicator. Combine them to come up with new trading ideas and boost your profit.
  • Conditions for entry and exit can be defined as simple as A+B; build expressions using logical, arithmetic and relational operators – nothing that a primary school child doesn’t know :)
  • Create strategies with no programming skills, in a savvy interface that makes it all a breeze.
  • Build new indicators by combining different ones together in mathematical formulas; You can even use indicators compounding on multiple levels.
  • This is all powered by a powerful backtesting engine that offers full historical data for all of the assets on the integrated exchanges.
  • You also get access to our advanced analytics module that will help you make informed decisions on how to improve the strategy.

On top of that, it’s free for new sign ups during Private Beta. Secure your spot! 🚀🚀🚀


Vestinda Trading Strategy Builder

Vestinda Trading Strategy Builder

Following your crypto portfolio should be as simple as a walk in the park, right? In the always changing crypto market, where innovations and new features are offered on a rapid pace by different players, crypto portfolio tracking is becoming a more complex topic.


What is a Crypto Portfolio?

A crypto assets portfolio is a series of investments across a number of digital assets. It could be a combination of Bitcoin, Litecoin, Ethereum, Dogecoin or others, with different weights to suit the risk appetite of the investor.

The exact mix of assets isn’t relevant to the definition, but you may want to focus on the exposure you get and on the weights that are right for you.


How to set up a Crypto Portfolio?

Step 1: Asset allocation

Since the goal of a financial portfolio is to optimize returns for your tolerance of risk, you need to know how to best determine an asset allocation that conforms to your personal investment goals.

Step 2: Build portfolio by choosing the initial weights for each asset

As with more conventional investments such as stocks and bonds, crypto assets portfolios should contain a good balance between investments. In the case of the crypto market, this can mean splitting those investments between more established projects like Bitcoin or Ethereum and more innovative new providers.

Step 3: Rebalance portfolio based on market conditions

Once you understand how to set up a portfolio, the next step is to keep pace with the ever changing crypto market.


What is a Crypto Portfolio Tracker?

A crypto portfolio tracker is an application (mobile or web) that lets you know how much your portfolio is worth at any given moment. It will track and display your investments in multiple crypto assets in real time.

The software connects with various exchanges to provide updates and to display current balance to the users. Many will also connect your crypto wallets.  


Why do You Need an App to Follow Your Net Worth?

As mentioned in the beginning, crypto portfolio tracking becomes more complex with diversification. And we know you should diversify.

Many crypto exchanges deal with a restricted number of crypto assets while others offer different functionalities. You may use staking on Kraken or Earn on Binance and at the same time trade Futures on FTX. In order to build a diverse portfolio, multiple exchanges are needed. That’s why crypto portfolio trackers come to the rescue: they offer a unified dashboard where you can follow your entire net worth, just one click away.

With a rising number of crypto assets and exchanges, it makes sense to utilize a crypto aggregator to easier follow your investments. Of course it’s possible to use traditional spreadsheets, but this is time consuming and requires constant monitoring and manual updating.

In contrast, by having all crypto in the same place, you can instantly assess your net worth overview and automatically monitor profit and loss. Essentially, a crypto tracker gives back your time. Now you can put more focus on your investment decisions or simply enjoy your profits.


How to Track Your Crypto Assets Portfolio

It’s important to know how to manage a crypto assets portfolio effectively, without giving away most of your time. As hinted at in the previous section, there are really only two ways in which to do this:

One option would be for you to undertake the task yourself by utilizing spreadsheets and updating your results manually. There are crypto traders who keep track of their crypto in this way and some may prefer it. It may feel that it gives them a greater sense of control, but in the end it’s just Excel :)


Obviously, a better solution lies in finding a tracker. The most flexible of these can be used as an app for iOS and android, as well as the web, and they return real time results. You can monitor as much as you want, as the platform will automatically sync your balances across exchanges. 

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How to Choose the Best App to Manage Your Portfolio?

There are many crypto trackers on the market. So how do you choose the right one? 

You should be looking for a portfolio tracker that ticks a number of boxes: 

  • It should integrate with an extensive range of financial institutions. As we’ve seen, there are many potential exchanges and an increasing number of outlets where crypto can be purchased.
  • There are more than 11k tokens on the market at this point so an effective crypto tracker should integrate as many assets as possible.
  • New assets should be added as soon as they hit the market. Make sure your preferred solution reacts fast.
  • Real time results with 24/7 monitoring is a must. Needless to say, the data gathered from those various exchanges should be accurate. 
  • A crypto tracker should be secure. In a crypto world where hacks are tried every day, you want to work with the best technology.


Why Choose Vestinda to Track Your Crypto Portfolio?

Vestinda successfully checks all of those essential requirements. On top of that, it’s free for new sign ups during Private Beta.

Meet Vestinda’s portfolio tracker superpowers:

  • Accurate history of the portfolio shown on a chart from the moment you connect your exchanges.
  • Automatic syncing of assets from the connected Exchanges – you don’t have to manually enter each of their assets balance or trades.
  • Great UX – you can monitor your portfolio both on desktop and mobile, 24/7 at one click. Multiple charts and different views give you a simple and crisp overview of your holdings.
  • The portfolio tracker will allow you to isolate and monitor a specific exchange. With a click of the button you can switch back to the unified dashboard which outlines all of your investments in full.


Want to check out these superpowers?

Create your account and follow your net worth smarter with a best in class crypto portfolio tracking app!


Vestinda Portfolio Tracking

Vestinda Portfolio Tracking Dashboard