Running New Backtest

The backtester lets you quickly and easily test the historical performance of a strategy. Here is everything you need to know to run a new backtest.

The Option Alpha autotrading platform includes a backtester. Backtesting is a tool that gives you context around the historical performance of a strategy. Backtesting is not indicative of future performance, but it may help you discover, confirm, or avoid specific strategies.

Running a new backtest is simple. From the Option Alpha homepage, select “Backtester.” This will take you to the backtester homepage. Select “New Backtest.”

Screenshot of the backtester homepage with new backtest highlighted

This page will define the criteria of your backtest. You can customize five settings:

  • Ticker symbol
  • Backtest duration
  • Trade frequency
  • Capital
  • Strategy
Screenshot of the new backtest criteria display

You can choose from the list of available ticker symbols. 

Screenshot highlighting the ticker entry display on a new backtest

There are four backtest durations available with different lookback periods: 

  • 1-year
  • 3-years
  • 5-years
  • All-time (for the history of the ticker symbol)
Screenshot highlighting the backtest duration options available for a new backtest

There are four trade frequencies available: 

  • Sequential trades only open new positions once an existing position has been closed. 
  • Weekly trades open a new position every week if there are available positions and/or capital.
  • Monthly trades open a new position every month if there are available positions and/or capital.
  • Quarterly trades open a new position every quarter if there are available positions and/or capital.
Screenshot highlighting the trade frequency options available for a new backtest

Enter a starting capital amount. You can create up to three allocations and compare how the different allocation settings would perform using the same backtesting data. 

Screenshot highlighting the capital allocation options available for a new backtest

Each allocation field gives you four options:

  • % of capital per position (dynamic as account size fluctuates)
  • % of capital per position, with a maximum percentage total for all positions at once
  • $ amount per position
  • $ amount per position, with a maximum percentage total for all positions at once
Screenshot highlighting the four capital allocation options available with a new backtest

Finally, choose a strategy to backtest from the available options in the dropdown menu.

Screenshot highlighting the strategy options available for a new backtest

The options strategies require you to input entry conditions specific to the strategy: 

  • Short and/or long option delta
  • Days until expiration
  • Minimum and maximum IV rank
Screenshot highlighting the delta, days to expiration, and IV rank entry conditions for a new backtest

The options strategies require you to input exit conditions specific to the strategy:

  • Profit-taking % 
  • Stop-loss %
  • Days to expiration
Screenshot highlighting the profit-taking, stop-loss, and days to expiration exit conditions for a new backtest

When you finish setting up the strategy, select “Run Backtest” to view the results.

NOTE: It may take a few minutes for the backtest to complete. Once the backtest is queued, you can exit the page, and it will be available on the Backtester homepage under the “My Backtests” tab.

Screenshot of the backtester homepage with my backtests highlighted


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FAQs

How long does a Backtest take to run?

A backtest can take a few seconds to several minutes, depending on the complexity of the strategy, the number of criteria, and the amount of historical data being referenced.

Does backtesting guarantee that a strategy will work in the future?

No. Past performance is not indicative of future results.

What are the benefits of backtesting?

Backtesting provides a trader with insight into how a particular strategy has performed historically in varying market conditions.

Can I choose set periods of time I want to backtest?

Yes, you can run a backtest for one, three, and five years, or all time.

Why would I compare multiple capital allocation scenarios?

Capital allocation provides great insight into how a strategy will perform when assigned a different amount of trade capital. For example, over-allocating your capital may prove to be disastrous to your account with one strategy.

Can I change the capital allocation scenarios and test multiple scenarios?

Yes, you can choose to test three different allocation strategies per backtest. You can also compare allocation types by testing % based allocation and $ based allocations and compare them to see how one performed relative to the other.

Why would I use a percent allocation vs. a fixed-dollar allocation?

Percent allocation would allow you to have a fixed % of your account allocated on a per-trade basis instead of a standardized dollar amount. This can be beneficial because it would change as your account changes over time. If your account grows in value, the percentage allocation will also increase, for example. Ultimately, percentage allocation allows you to be more flexible based on your account size and growth rate.

Why would I set a max allocation parameter?

Max allocation ensures that you do not over-allocate your account to several different positions. For example, If you allocated 5% per trade and had ten open positions, you would have a total percent allocation of 50%. If you only want a maximum allocation of 25%, you would be capped at five open positions at any one time.

Why would I use a maximum percent total for all positions at once?

Similar to having a maximum dollar-based allocation, this would ensure that you did not risk more than a certain percentage of your account at any time.

Can I set stop losses and profit targets when Backtesting?

Yes. You can set 25%, 50%, and 75% profit-taking, as well as stop-losses up to 300%.

Can I only select preset DTE's from the pulldown list?

Yes, the Backtester has ten predefined DTE's: 10/15/20/30/40/50/60/70/80/90

While backtests are running can I navigate around and explore other backtests?

Yes.

Where can I see backtests that I have previously run?

The “My Backtests” tab displays all your backtests.

Can I backtest the exact parameters I want to use in a bot or automation?

Currently, the Backtester does not have the functionality to backtest a specific bot. However, you can manually create a bot based on a backtest and even modify the strategy with more detail than the backtest allows.