Sat Sep 23 2023
Testing your cryptocurrency trading bots before deploying them on the live market is absolutely essential. Here are some top guidelines to keep in mind and how algorithmic cryptocurrency trading platforms can help with this.
If you’re on the cusp of deploying an algorithmic cryptocurrency trading bot, ensuring it is thoroughly tested is crucial. The difference between a profitable bot and one that burns through your funds can often be attributed to rigorous testing. In this article, we will explore the importance of testing, the difference between backtesting and paper-trading, and how long you should test before launching your cryptocurrency trading bot on the live market.
Whether you’re a developer custom-coding your own crypto trading bots or a retail investor looking to leverage the power of algorithmic cryptocurrency trading platforms such as Aesir, understanding the testing process is essential. The goal is to ensure your bot performs reliably under various market conditions. Testing is a leading principle across so many fields, and algorithmic trading is no different. Car manufacturers wouldn’t dream of launching a new model without extensive and rigorous testing beforehand. Trading without testing a little more than gambling, so unless you’re looking for a casino, testing your strategy is an unskippable step.
Let’s break down the two main approaches to trading.
Backtesting involves running your crypto algo trading strategy on historical data to see how it would have performed over a certain period of time in the past. It’s a quick method to get a sense of potential performance. However, backtesting doesn’t always account for real-time issues like slippage or liquidity concerns.
Paper trading, on the other hand, is live testing in a simulated environment. For example, algo crypto trading platforms like Aesir offer a paper trading mode that works on real-time live-market data, but places “fake” orders with monopoly funds. It’s an invaluable way to see how your bot performs in real-time without risking real capital.
Backtesting and Paper Trading are not mutually exclusive, and whenever possible, both should be employed before taking a strategy to the live market, simply because they both have their own set of pros and cons, but combined, you are likely to get a better picture of your trading bot’s performance.
If possible, start with Backtesting. The challenge here is finding or building a Backtesting system that is compatible with your trading strategy, but the testing itself can be completed within minutes. If you can Backtest, you should aim to test under multiple market conditions. Start with a market similar to the one we’re in now. Next, move to a market opposite to the current one, and finally include a backtesting run from a market cycle including both conditions.
Because it’s happening in real-time and with real market data, Paper Trading can take quite a bit longer compared to Backtesting. The general amount of time needed to draw conclusions for your crypto trading bot generally depends on your trading strategy. If you’re placing several trades a day, a week or 2 might be enough under the current market conditions. If you’re going for a longer term approach, you might need to extend the testing period.
Try and find patterns in the data based on the number of datapoints you have. Check your profitability on 50, 100 and 200 trades. Does the data change with more trades? Is it due to a change in the market? If the profitability of you crypto trading bot stays roughly the same with increasing number of trades, it means you probably have enough data to draw an initial conclusion.
After satisfactory results on Backtesting and Paper-Trading, you can consider deploying your bot on a live market but with a limited amount. This final phase of testing in real-world conditions is crucial, as it provides insights into your bot’s live-market behavior. Because neither Backtesting not Papertrading trades ever compete in a live order-book, it’s likely that live trading results may marginally differ.<
While testing, always ensure:
A golden rule: never assume Backtesting results will perfectly mirror real-life outcomes. Numerous variables in live markets can deviate from historical data. Therefore, even after successful Backtesting, live testing (paper trading) is pivotal.
Real-life experiences can sometimes be challenging. You might see excellent Backtesting results and think you’ve struck gold. Yet, real-world trading can be starkly different. Factors like indicator repainting can drastically skew results. Continuous learning, tweaking, and persistent testing are keys to success.
Developing an efficient algorithmic cryptocurrency trading bot requires patience and diligent testing. By understanding the nuances of Backtesting and Paper Trading, and by methodically progressing through the testing phases, you’ll stand a better chance of having a bot that not only works but thrives in the cryptocurrency market.
The best way to learn is by doing, get started on Aesir with a free cryptocurrency trading bot!