How to Backtest Trading Strategies on TradeStation (Step-by-Step)

Backtesting on TradeStation helps you test trading strategies using historical data to evaluate performance before live trading. Here’s how to get started:

• What is Backtesting? It’s testing a trading strategy on past market data to measure profitability, risk, and consistency.
• Why TradeStation? It offers powerful tools like EasyLanguage for coding strategies, no-code options, and detailed performance reports.
• Steps to Backtest:
  1. Write clear trading rules (e.g., moving average crossover).
  2. Set up parameters like position size and risk.
  3. Choose historical data for testing (e.g., 5–10 years for stocks).
  4. Account for trading costs (commissions, slippage, spread).
  5. Run the backtest and analyze reports (profit factor, win rate, drawdown).
• Improve Your Strategy: Optimize parameters, validate with walk-forward testing, and avoid overfitting.

Use this guide to refine your strategies and transition to live trading with confidence.

Setting Up Your Strategy

Writing Trading Rules

Clear trading rules are key to success. Instead of vague instructions like "buy when the market looks bullish", create specific, measurable entry and exit criteria. For example, base your rules on market data or technical indicators. TradeStation’s EasyLanguage simplifies this process with its user-friendly, English-like syntax .

Once your rules are defined, you can implement them using EasyLanguage directly or with no-code tools.

Building in TradeStation

After defining your trading rules, TradeStation offers two main ways to bring them to life:

• EasyLanguage Coding: Write your strategy using TradeStation’s proprietary language.
• No-Code Tools: Platforms like Build Alpha can help you generate EasyLanguage code without manual programming.

For example, here’s a basic moving average crossover strategy in EasyLanguage:

If Close[9] crosses above Average(Close,10)[9] then buy 100 shares next bar open; 
If Close[9] crosses below Average(Close,10)[9] then sell 100 shares next bar open; 

Basic Parameters Setup

Before running a backtest, configure critical risk and position parameters. Here’s a simple guide for position sizing based on account size:

Adjust these parameters to fit your strategy.

Also, set the Max Bars Back parameter to ensure enough historical data for calculations. For instance, if your strategy uses a 200-period moving average, set Max Bars Back to at least 201 for accurate results .

Risk management tips:

• Use stop losses tied to technical levels instead of random amounts.
• For smaller accounts, risk 1-3% per trade.
• Larger accounts can use fixed-dollar stops to maintain consistent risk exposure .

TradeStation Test Settings

Data and Time Selection

TradeStation provides historical data for a variety of asset classes, broken down as follows:

When choosing a testing period, aim to include a mix of market conditions, such as both bull and bear markets. For example, testing a stock trading strategy often requires 5–10 years of historical data to ensure a comprehensive evaluation .

TradeStation allows you to define your backtest period in three ways:

• Time span from the current date
• A specific number of bars from a given date
• A custom date range with a defined start and end date

Once the historical data range is set, the next step is to adjust trading cost settings to better simulate real-world conditions.

Trading Cost Settings

To configure trading costs in Chart Analysis, go to Studies > Edit Strategies, click on Properties for All… under the Strategies tab, and navigate to the General tab .

For accurate backtesting, ensure you include these cost elements:

Failing to account for these costs may result in overly optimistic backtest outcomes, which could lead to unexpected losses in live trading .

Max Bars Settings

The Max Bars Back setting determines how much historical data your strategy can access for calculations. By default, this is set to 50 bars , but more complex strategies often require a higher value.

To configure Max Bars Back:

1. Add up the longest lookback period of your indicators.
2. Include a 1–2 bar margin for safety.
3. Use the "Auto-Detect" feature if you’re unsure of the exact value.

For instance, if your strategy uses a moving average with a 200-bar lookback, set Max Bars Back to at least 201 .

The "Auto-Detect" feature in TradeStation can help identify the optimal Max Bars Back setting . Always verify this configuration before running your backtest to ensure accurate and reliable results.

Running Your Backtest

Test Execution Steps

To run a backtest in TradeStation, follow these steps:

1. Open Chart Analysis by navigating to View > TradingApp Launcher > Chart Analysis or File > New > TradingApp Window > Chart Analysis .
2. Add your strategy by selecting Insert > Strategy or by right-clicking on the chart and choosing Insert Strategy .
3. Adjust the strategy settings: apply your broker’s commission rates, estimate market slippage, set correct trading hours, and define your position size and risk parameters.

Once the backtest is running, use the performance report to evaluate the results.

Reading Test Reports

After running the backtest, review the Strategy Performance Report for detailed insights. Access it by pressing ALT + SHIFT + P or by going to View > Strategy Performance Report . This report is broken into several key sections:

For day trading systems, aim for a profit factor of at least 1.5:1. Swing trading systems should target 2:1 or higher . A good equity curve shows steady growth with minimal drawdowns.

Results Analysis

When reviewing backtest results, pay attention to these key metrics:

• Profit Factor: A profit factor over 1.5 suggests strong performance .
• Win Rate: Even a system with a win rate near 47% can be profitable if the reward-to-risk ratio is favorable .
• Risk Management: For example, a system generating $12,000 across 167 trades with a maximum drawdown of $1,690 reflects solid risk control . Ensure the maximum drawdown aligns with your risk tolerance.

To ensure the strategy is reliable:

• Test it under various market conditions.
• Use "look-inside-bar back-testing" with the smallest timeframe available .
• Validate results with out-of-sample data .
• Conduct forward testing on a simulator account before trading live .

sbb-itb-049b7c8

Strategy Improvement

Parameter Optimization

Leverage TradeStation’s tools to experiment with different parameter combinations and evaluate your strategy’s performance using the built-in ‘All: Net Profit’ fitness function .

Here’s how to approach it:

• Clearly define your trading hypothesis.
• Focus on 2-3 key parameters for optimization.
• Test your strategy under varying market conditions.
• Record and analyze performance metrics for better insights.

Walk-Forward Testing

Once you’ve optimized your parameters, validate your strategy with walk-forward testing to ensure it works on unseen data. TradeStation’s Walk-Forward Optimizer offers an automated way to conduct this analysis .

Some common testing methods include:

• Rolling Window: Continuously updates data, making it ideal for short-term strategies.
• Anchored Window: Adds new data while keeping old data intact, better suited for long-term strategies.
• Cluster Analysis: Groups data by market conditions to assess performance across different environments.

A practical approach is splitting historical data into 70% for training and 30% for validation . This helps you evaluate how your strategy performs in various market scenarios.

Preventing Over-Optimization

After optimization, it’s crucial to ensure your strategy isn’t overfitted to historical data. For example, a strategy trading US 30-year bond futures based on Japanese Yen signals might show great backtest results but fail in live trading .

Keep an eye on these key metrics to spot overfitting:

To ensure the reliability of your strategy:

• Stick to simpler designs.
• Test during periods of high market volatility.
• Account for transaction costs in your analysis.
• Use tools like Build Alpha alongside TradeStation for more rigorous robustness testing .
• Incorporate out-of-sample testing to validate your results further.

Desktop QuickStart – Test Strategy Performance Against Historical Data

Live Trading Setup

After thorough backtesting and refining your strategy, moving to live trading requires careful preparation and oversight. TradeStation offers tools to help automate and monitor your trading strategies effectively.

Performance Monitoring

TradeStation provides three key tools to keep an eye on your strategy’s live performance:

• Strategy Performance Report: Tracks detailed metrics like profit, drawdown, and trade statistics .
• Strategy Equity Indicator: Shows real-time equity curves to help you visualize performance .
• On-screen Trade Markers: Highlights entry and exit points directly on your charts .

You can set up notifications – via email, visual alerts, or sound – using TradeStation’s alert settings to stay updated on strategy-generated orders . To ensure smooth execution, a dependable VPS (Virtual Private Server) setup is highly recommended.

VPS Setup

A quality VPS is essential for reliable strategy execution. When choosing a VPS provider, prioritize the following specifications:

QuantVPS offers specialized solutions tailored for TradeStation users. Their VPS Pro plan ($99/month) provides excellent performance, with servers in Chicago to minimize latency for futures trading . Once your VPS is in place, maintaining your strategy becomes the next focus.

Strategy Maintenance

Follow these practices to ensure your strategy runs smoothly:

• Daily Checks: Monitor key metrics like strategy execution status, order fill rates, actual versus expected returns, and system resource usage.
• Weekly Reviews: Use the Strategy Performance Report to review trade accuracy, check for slippage, verify risk settings, and ensure equity curve consistency.
• Monthly Maintenance: Update software, apply VPS security patches, review position sizing, and compare live trading results to your backtest data.

Before activating automation, confirm these settings :

• "Generate Strategy Orders" is enabled.
• "Automate execution" is selected.
• The correct trading account is linked.
• Position sizing matches your risk parameters.

"ChartVPS has become my trading partner. I say this because I no longer need to buy nor worry about maintaining a computer for trading… Staff at ChartVPS always ‘have my back’. When I’ve a question or need help I get prompt responses, day or night, wherever I am in the world. Choosing ChartVPS has helped me reduce costs, reduce worry about timely trade execution, and enables me to increase focus on improving trade results. ChartVPS has earned their 5 stars!" – Ben Birdsell, Trader

Conclusion

Process Overview

To achieve accurate backtesting on TradeStation, follow a structured approach. Start by crafting a well-thought-out trading strategy and coding it using EasyLanguage. Pay attention to critical details like accounting for realistic transaction costs, enabling intra-bar backtesting to reduce bias, and ensuring a sample size of at least 100 trades across varying market conditions . These steps provide a solid base for further testing and validation.

Next Steps

Once you’ve completed your initial backtest, focus on these essential validation stages:

It’s important to test your strategy across various market conditions and timeframes . If these validation steps confirm its reliability, consider refining it further using additional resources.

Additional Tools

TradeStation offers valuable tools like the Strategy Performance Report, which provides in-depth analytics for both backtesting and live trading . For seamless execution, consider using a trusted VPS service with low latency. If you’re looking for more advanced validation options, Build Alpha can enhance TradeStation’s capabilities, especially for analyzing portfolios .

"A good backtest reflects real-time trading accuracy, not cosmetic performance"

Use advanced techniques to ensure your strategy can handle real-world challenges .