What is a Backtest?
A backtest is a interactive tool that simulates a trading strategy and how it may have performed in the past using historical data. It's important to know what assumptions go into these and how they differ from trading on the Double platform.
Key Points to Understand
Hypothetical Nature: All backtest results are hypothetical and benefit from hindsight. If a backtest comprises stocks that have gone up over the past year, it's performance is no indicative of any possible future returns.
Past Performance: Past performance is not a reliable indicator of future performance.
Estimation: Backtests estimate how a model performs under specific market conditions and are not recommendations for actual trading decisions in the past or the future.
Variability: Results may vary with each use and over time.
Data Sources
Backtests: For backtests on Double, we use adjusted daily closing prices, accounting for corporate actions like splits and also dividends. These prices do not represent real quotes from any points during the trading day. When trading on the Double platform, real intraday prices are used and will differ from backtest prices.
Universe of Investments: You can see the universe of investments included in any backtest on each backtest page. This universe includes the stocks and ETFs that Double may trade, which are the fractionable stocks our brokerage partner Apex Clearing has approved. Please note that other investments not considered and outside the universe of investments on Double may have characteristics similar or superior to those being used in the backtest.
Dividends and Distributions
The Prices used in our backtests involve the reinvesting of dividends and distributions, while live trading on Double by default does not reinvest dividends. This is because with live trading we use any dividends to optimally rebalance your portfolio.
Costs Considered in Backtests
Slippage: Slippage reflects the potential cost difference between hypothetical trades in your backtest and actual trades that might encounter price movement and spread. The amount of slippage is influenced by market conditions, liquidity, and bid-ask spreads. The default slippage setting in backtests is 5 basis points (bps) but can be configured by the user.
Benchmarks and Indices
The SPY ticker is used as the default benchmark against which all backtests are compared. This comparison is for reference purposes only. Depending on the holdings in your portfolio, your investment objectives, and your risk tolerance, it may be more appropriate to measure performance against a different benchmark.
Backtesting ETF based Strategies on Double
By default for any ETF based Strategy on Double, the backtest is done against the ETF ticket that the strategy is following. The actual investable portfolio on Double can be meaningfully different than the ETF, since the universe of stocks on Double is different than the universe of stocks used by the ETF.
Always consider economic factors, market conditions, and investment strategies when evaluating the potential performance of a portfolio. There are no guarantees that a strategy will match or outperform any particular benchmark, or generate future returns anywhere near its past returns.