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Catalin
Published On: Jun 26, 2024
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Effective Crypto Trading Strategy: Test Before You Invest

Test Before You Invest: Smart Ways to Try Crypto Trading Strategies

Introduction

The crypto market is a highly volatile environment that requires thorough preparation and forecasting. Testing strategies before making any investment is crucial for ensuring good risk management and preserving capital.

Testing before you invest will provide traders with valuable information on key aspects of their strategies and likewise on how the chosen instrument has moved in previous times.

To meet expectations, traders have to use some different methods to evaluate the market conditions and, at the same time, the effectiveness of strategies to implement.

Let's see:

  • Backtesting: testing a strategy on the historical data of an instrument.
  • Forward testing: Testing a strategy in actual charts to measure the effectiveness in current market conditions.

While backtesting has key benefits providing insights into the efficiency of a strategy on past-time market conditions and through it, forward testing evaluates real-time markets, in this case the trader could test his strategy with a decreased size of his positions and gain confidence exposed to real psychological conditions.

Smart Ways to Try Crypto Trading Strategies

Key Takeaways

  • Volatility might generate circumstantial times of uncertainty in the market. Testing a strategy will help address what is working and what is not. 
  • Paper trading is an emulation of trading real money. The trader will get key insights on appropriate risk-reward ratios, adequate capital management, the time spent on losing positions versus winning positions, and the profit factor.
  • Taking notes on real market performance when it starts to go wrong and journaling execution will help traders focus on the exact necessities of the implemented strategy, without getting distracted by side aspects.
  • To guarantee the efficiency obtained once a strategy has been tested, traders would want to analyze results like order data, risk management, capital increase/decrease, key levels, and volatility, and then compare them to real situations.

Importance of Testing Trading Strategies

Crypto trading is a field in constant change, much more than traditional markets. Once in a while, a new crypto arises or a new update on technologies behind current coins emerges, these factors could lead to periods of unexpected results in the market with a strategy that passes from winning to losing.

To understand these contexts and assess the real performance of a strategy, testing methods can help determine if there is an abnormal period in the market or if the strategy needs to be refined.

Every trading strategy has pros and cons to consider. Carrying a strategy to implementation that the trader does not know will lead to confusion and probably undisciplined behavior.

Volatility can benefit tested strategies that account for it. However, a strategy that doesn't focus on volatility is unlikely to survive in the context of significant price movements.

Importance of Testing Trading Strategies

Methods for Testing Trading Strategies

Backtesting is the process of collecting historical data from a financial instrument to be tested in contexts of simulated trading. Its purpose is to offer traders reliable insights on what works from a strategy across multiple market conditions over past candles.

Paper trading is a demo setting that lets traders test strategies with all the features in real market conditions. The key benefit of this method is letting traders have a real approximation of markets, without fears of losing real money. It is especially good for novices.

Another case to point out is the real-time simulation. The key here is to build strategies with real market experiences, using technical indicators, improving psychological strengths, and planning real management responses.

Using Altrady for Strategy Testing

Altrady’s platform offers the ideal setup for novice and experienced traders to start testing strategies: paper trading, backtesting tools, algorithmic and alert functions.

The paper trading option of Altrady comes with all the necessary tools to enhance and refine strategies through backtesting:

  • Trading journal: save notes on performance and track your behavior to avoid repeated mistakes.
  • Screenshots journal: you can also keep screenshots of past operations to gain confidence in the plan by knowing what has worked out and what has not.
  • Leveraging Altrady’s paper trading features to simulate real-time trading without financial risk.

Paper trading is a great feature to use to test before investing. In the Altrady platform, a trader will be able to set price alerts, keep track of those trades, and smart trade to assess appropriate ranges for stop loss and take profit levels. 

Using Altrady for Strategy Testing

Analyzing and Refining Strategies

Once a tested trading period has come to an end, analyzing data will be a prior step to going live. 

  1. The trader could analyze key zones.
  2. Assess how much a pattern is repeated over time.
  3. Calculate appropriate SL and TP margins according to volatility.
  4. Calculate the profit factor and the rate of assertion.

In the ultimate instance, the trader would want to compare all of this data to real market conditions.

Backtesting and paper trading are not fictional market conditions, just a tool to test trading approaches risk-free. Common patterns and adjustments to consider will include:

  1. Credible risk management rules. Do not underestimate real market conditions.
  2. Keep your expectations a little lower as setting expectations too high may be outside of your current experience and skillset and otherwise may not work in real money markets.
  3. Planning a trading guideline based on simulated data forgetting real and current conditions of the market.

A strategy will be ready to go live when this has met all the requirements of a trader and his trading plan. Any pitfall detected on the way should be an object of revision to refine it.

Analyzing and Refining Strategies

Conclusion

Backtesting is an essential approach for those who aspire to master the art of trading. Without backtesting, it would be impossible to survive in the long term, especially in constantly changing environments like the crypto markets.

Backtesting comes precisely out of the necessity to adapt to new market conditions consistently.

Take some time and leverage backtesting and free paper trading platforms like Altrady to begin knowing better your strategy's performance.

Let's point out some tools of Altrady to make testing effective:

  1. Watchlists and alerts.
  2. Journaling.
  3. Charting tools.
  4. Smart trading.

Call to Action

Remember to take backtesting and paper trading seriously to get the most out of them. Don't overlook these methods thinking they aren't 'real' trading. In fact, these methods are designed to help traders transition to live trading effectively.

Altrady is the ultimate platform, all-in-one, to start paper-trading for free. Sign Up and start a backtesting journey.
 

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Catalin

Catalin is the co-founder of Altrady. With a background in Marketing, Business Development & Software Development. With more than 15 years of experience working in Startups or large corporations. 

@cboruga
@catalinboruga5270