How To Get Started Doing Fast Backtesting Using Algo Trading Tools?
Algorithmic trading has become quite popular in options trading.  Algo trading uses complex and accurate settings to gain stable and consistent profit from the trade.  It eliminates human error and makes your options trading effective and profitable.  The algorithmic trading app also helps you create your hedge funds. As per the statistics, the market size of global algorithmic trading is estimated to reach $31,494 billion by 2028.
However, any precise software solution can go wrong and so do Algo trading apps.  And you would surely not want to lose a huge amount for faulty software.  Thanks to backtesting tools, you no longer need to worry about it.  So, if you are an options trader and want to make your trading more precise with backtesting, keep reading.  Here we will discuss how to start backtesting with Algo trading tools.

What Is Algorithmic Trading?

Let us learn about algorithmic trading before discussing how to backtest your trading strategy.  This will help you grasp the concept better.  Algorithmic trading is trading that comprises several instructions aiming to complete a task or process.  Options trading app or Algo trading app is software that uses algorithms and complex mathematical models to provide proper and precise trading suggestions.

Sometimes, an options trader is not skilled enough or sufficient to carry a huge amount of trade.  In such cases, an algorithm trading app can help them make an accurate decision and cut out the risks related to human errors.

Algo trading has become increasingly popular recently, and many leading or top-grade options traders use the Algo trading app for the trade.  This algo app uses a complex mathematical process to analyze regular trade and quotes in the stock market and utilize predetermined settings to make precise and intelligent trading decisions.

Algo trading apps like SpeedBot are computer directed and help to reduce transaction costs, enabling investment managers to have complete control over the trading process.  They also offer continuous and stable returns for the fund manager and help them easily absorb the cost; as a result, trading becomes more effective.

Benefits of Algorithmic Trading

Algorithmic trading is becoming very popular among new-age options traders.  As per the statistics, almost 50% of investors feel that workflow efficiency is crucial for getting optimal performance in algo trading. So, they love to use an algorithmic trading app over manual trading as it offers plenty of benefits.  And below, we will discuss some of them -

  • Reduce Manual Trade Errors:
    The algorithmic trading app uses complex mathematical models and analyzing methods to make precise trading decisions. Thus, it helps to eliminate human/manual errors in trading.
  • Avoid Significant Price Changes:
    It trades timely and correctly to avoid any significant price movement.
  • Offers Best Price Trade:
    Another essential benefit of using an options trading app or Algo trading app for options trading is it executes trades at the best price.
  • Accurate And Instant Trading:
    Options trading is about the right time and move, and algorithmic trading allows instant and accurate order placement.
  • Cuts Down Transaction Costs:
    Algorithmic trading also reduces the cost of transactions in trade to make the trades more profitable and effective.
  • Reduce Emotional Involvement-Related Risks:
    Algo trading involves detailed analysis, complex mathematical processes, and predetermined settings to take trading decisions.  Therefore, it eliminates all kinds of human errors, including emotional involvement-related trading mistakes.
  • Automate Checking For Various Market Conditions:
    Algo trading also allows users to automate the checking process, making it more accurate and faster.
  • Available For Backtesting:
    Algorithmic trading strategies can be tested with historical and real-time data.  It shows the workability of a particular strategy in different time frames and market scenarios.
    So, traders can test and ensure the viability of that strategy before using them in their options trading.  They have a backtesting engine that can easily help traders detect whether a trading strategy is beneficial.
  • Efficiently Perform HFT or High-Frequency Trading:
    High-frequency trading or HFT capitalizes by placing a large number of trades on different markets and decision parameters at high speed. And Algo trading only allows traders to perform HFT (unlike manual trading).

What Is Backtesting?

Backtesting is a Method of testing your options trading strategy to ensure their potential to profit from the trade.  It calculates the success rate of a trading strategy by testing its performance in previous trading scenarios. 
The main theory behind this is that if any strategy worked well in the past, it will also likely work well in the future.  And if a strategy fails to work well or earn profit in previous market conditions, it will also not perform well in current times.

A trading bot backtesting uses historical data to simulate and test an algorithmic trading strategy and its potency to earn profit.  It also enables traders to analyze the profitability and risks of a trading strategy before investing any capital into it. 

In addition, when the backtesting is performed accurately, the fund manager can be assured that the algorithmic trading strategy is beneficial and will yield significant profit.  It also helps traders to identify a suboptimal strategy and discard or modify them according to their needs.

The strategies taken by the options trading app primarily depend on backtesting to establish their value and accuracy.  Backtesting is essential to understand the efficiency of the trading strategy, and it becomes more important when you deal with huge capital in trading.

Also, remember to set a period while using a backtesting engine; it will help you understand the profitability of the trading strategy.  And if the test is successful, performing backtesting on alternative time frames allows you to understand its viability and success rate.

Know The Three Aims of Backtesting

Backtesting is an essential part of algo trading that helps evaluate a trading strategy's performance and success rate depending on the historical data analysis.  And there are mainly 3 aims of backtesting.  Below we will discuss them in detail.

1: Check The Performance During The Selected Time Frame

The first aim of backtesting among the three is to check the performance of an algorithmic trading strategy in a particular time frame. Backtesting can help you check if a strategy makes a profit when it should and vice versa.

For instance, let’s assume one of your Algorithmic strategies shows it will perform better in a less volatile market.  But when you backtest your strategy with a backtesting engine, it works well in volatile conditions. 

This is not a good sign.  As it shows something is wrong with your algorithmic strategy, and it is not performing as it is supposed to do.  Therefore, when you see a such discrepancy in your Algo strategy and backtesting results, you must analyze your strategy and identify where it went wrong.

2: Check The Performance in Different Markets

Backtesting is also performed in different market scenarios to ensure the profitability and consistency of a trading strategy.  It means you can do the backtesting not only in past timelines but in different market scenarios and with other market assets like stocks, currency, mutual funds, etc.

Another great way to do the backtesting in different market scenarios is by comparing different time frames where the market trends are not obvious and where they are not.

And if the trading strategy performs well in different market conditions, it is more likely to be profitable and yield good returns for the investment.  For instance, if a trading strategy works well in past scenarios and different asset markets, they are most likely to succeed in the present too.

3: Improving or Modifying The Strategy

Most Algo trading apps have a trading bot backtesting facility that users can use to identify the potency of a trading strategy and improve it if needed.  Once you have performed backtesting, you can easily modify your trading strategy depending on the backtest results.

Therefore, a trader can improve and reanalyze a strategy until they are satisfied with the outcomes. It is one of the biggest plus points of backtesting as it helps to improve the strategy and eliminate the mistakes and errors that can cost huge money if applied without backtesting.

However, you must remember not to overfit with backtesting, assuming it will work well.  If you spend too much time in backtesting and try to overfit, you will rarely make any profit when you apply in real-time.

Algo Trading Tools For Backtesting

There are multiple algo trading backtesting tools that help is fast and accurate backtesting.  Here are some of them –

  • MetaTrader:
    MetaTrader is one of the most popular and widely used algo trading tools that offers backtesting. It has a vast community and provides wealth-related information to perform accurate backtesting results.
  • Active Trader Pro:
    Another essential backtesting tool is Active Trader Pro.  It not only helps you to backtest your strategy but also helps you build a successful trading strategy.
  • Thinkorswim:
    The Think OnDemand option on Thinkorswim helps to backtest your Algo strategy. And provide precise results.


Backtesting is vital in algorithmic options trading, especially when the trade is automated and performed in an options trading app.  It helps you verify the success rate of the trading strategy before investing capital in it.  Backtesting uses historical data analysis and complex mathematical models to get precise results. 

Hedge funds are focused on yielding profit, and Backtesting is the ideal method to ensure that the particular Algorithmic strategy will earn profit.  In addition, backtesting also helps to build an algorithmic trading strategy that helps you earn stable profit for a reasonable time frame.  And here, we have covered everything you need to know about how to do backtesting using algo trading tools.
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How To Get Started Doing Fast Backtesting Using Algo Trading Tools?
Nisarg S 16 May, 2023
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