15.10.2024

Futures Backtesting

One crucial technique that traders and investors utilize to refine their strategies is futures backtesting. This process involves evaluating trading strategies by applying them to historical data, allowing traders to assess potential performance before risking capital in real-time markets.

In this article, we will explore the fundamentals of futures backtesting, its methodologies, and best practices.

What are futures?

Futures markets have been one of the most evolving markets for the past decades. So it is quite a big deal for a trader to understand the trading on such markets.

Futures are a financial instrument that is derived from the main financial asset. This is a contract for a buy or a sell of the main underlying asset for a certain date in the future, by the current market price. Various financial assets may be the underlying asset for the futures:

stocks
commodities
currencies
indexes
interest rate
etc.

For a better understanding of what futures are, let’s look at the example:

You want to buy a new car. With this in mind, you come to a car dealership, but there is no car of the desired specification. But you can order such a car by concluding a deal with the dealership and putting a deposit. In this way, you buy yourself a right to buy a car of the desired specification in the future.

Such a deal is similar to a futures contract or futures. Futures are commonly used in world economics by manufacturers and consumers of goods for their economic activity. Investment funds, hedge funds, and traders actively trade futures as well, with a goal to get a profit, and in such a way, they provide liquidity to other market participants.

Benefits of futures trading

Big range of futures for trading. Hundreds of futures are used on various world stock markets.
Hight liquidity of futures. This means futures may be sold or bought at any moment.
Low commissions for trading.
To buy futures, it is enough to have 2-25% of the value of the underlying asset, which allows a trader to trade with leverage.

Futures trading may bring a solid profit, but you need to understand how to do it right.

What do you need for trading futures in profit?

How to trade futures in a proper way? This is what you should pay attention to:

Risks. One of the benefits of futures is the possibility to make a purchase with a part of the price, but it may turn into the biggest disadvantage if you don’t know how to handle it. Most futures are traded with bigger leverage and if the volume for market entry is counted correctly, then even a small market movement against you may result in big losses. That’s why you should precisely calculate all the risks and allowable volume of the trading position according to your deposit before trading.
Futures specification. As futures have a direct link to the underlying asset, it is important to know which physical asset you trade and what factors affect its movement. E.g. oil futures will depend on the oil production volume, grain futures will depend on weather and harvest amount, British pound futures will depend on the British economy, etc. So a trader must understand what they trade with and which factors may affect the price movement of a particular asset.
Strong trends. The market of especially traded futures is susceptible to strong trends and thereby trend strategies will work well on such markets while counter-trend strategies will work worse. That’s why before choosing a strategy, you should examine the market which you want to trade on, and choose a strategy more suitable to this market.
Testing. The above paragraphs show that the futures market is strongly individual. The movement of one futures differs from the movement of others. So before starting real trading, it’s necessary to test your trading strategy on the history of these very futures. Testing on history is the only defence of your money, and your retention from reckless decisions on the market.

Futures are an uneasy instrument for trading, so explore futures you want to trade, and test your trading strategy on history. How to do this?

How to backtest futures

If you want to test futures trading qualitatively, you need to understand that you can’t do this without special paid software. Such software spares you thousands of dollars, which you will not lose from your deposits. Which steps should you take in practice?

Choose futures for testing. An incredible opportunity to test futures is provided by Forex Tester, in which you can test an impressive number of futures. For this, use the “Data Center” button:
In the emerged window, you may find the list of tools for testing. If you need to add new tools, simply use the “+ Add” button:
In the “Add new symbols” window, you can choose the futures from the following sections:
- Commodities. Here you can find futures for oil, gas, coffee, grain, corn, cacao, and other commodities.
- Indexes. In this section, there are futures for fund indexes of various countries: Australia, China, the USA, Germany, Japan, and other countries.
- Metals. Futures for metals: gold, silver, copper, platinum, palladium, etc.
- Majors. There are currency pairs in this section, but the market dynamics of spot currency pairs and currency pairs futures are absolutely identical, only quotations may differ. The instruments’ movement is equal. So if you want to test currency futures, you may test currency pairs. In this section, you will find classical currencies: euro, pound, franc, yen, etc.
Test a big area on history. After choosing the futures for testing, load the needed area of history. It is preferable to test a big historical area of 1-3 years to check the efficiency of your trading system during different market periods, during trend and flat, in summer and in winter, during crisis and rise. This goal must not scare you, because Forex Tester allows you to test one year in a few hours. The final time of testing depends on your trading system, but the testing itself spares you a hundredfold of time, which you don’t waste on a knowingly loss-making trading system.
Collect statistics on no less than 100 deals. You can fairly estimate a trading system only if enough deals have been traded through. You need no less than 100 deals for an objective analysis. “The more, the better” rule is real here. So if you can gather statistics on 500-1000 deals, this will be especially great.
Create a futures portfolio. If a trading system gave positive results on one future, there is a great probability that this system will work on other systems as well. That’s why after testing one future, try to test a few more. If you learn to trade 3-5 futures simultaneously, the results on your deposit will be far more steady. Because if one future has made a loss, the second one may give a profit. That’s why a portfolio of trading instruments is always more steady than trading with only one instrument that is futures.

Qualitative testing of futures is the key to your future success!

Conclusions: Futures backtesting

Futures are incredible trading instruments. It’s important to comprehend them and use them in trading. What you need to remember to trade futures in a profit: