Chapter 9. Backtesting

A backtest is a simulation of a model-driven investment strategy's response to historical data. While working on designing and developing a backtest, it would be helpful to think in terms of the concept of creating video games.

In this chapter, we will design and implement an event-driven backtesting system using object-oriented design. We can then plot our resulting profits and losses onto a graph to help us visualize the performance of our trading strategy. Is this sufficient to deduce a good model?

There are many concerns to be addressed in backtesting, for example, the effects of transaction costs, execution latency of orders, access to detailed transactions, and quality of historical data. Notwithstanding these factors, the primary goal of creating a backtesting system is to test a model as accurately as possible.

Backtesting involves a lot of research that merits its own literature. We will briefly cover some thoughts that you might want to consider when implementing...