Correctness of Backtest Engines

TL;DR

This paper addresses the challenge of verifying the correctness of backtest engines in trading platforms by proposing models and tests to ensure their accuracy in calculating historical performance.

Contribution

It introduces models for candles and intra-period prices and provides a method to verify backtest engine correctness through specific tests.

Findings

Models enable proof of backtest engine correctness

Tests can verify accuracy on model candles

Algorithmic considerations allow fast implementation

Abstract

In recent years several trading platforms appeared which provide a backtest engine to calculate historic performance of self designed trading strategies on underlying candle data. The construction of a correct working backtest engine is, however, a subtle task as shown by Maier-Paape and Platen (cf. arXiv:1412.5558 [q-fin.TR]). Several platforms are struggling on the correctness. In this work, we discuss the problem how the correctness of backtest engines can be verified. We provide models for candles and for intra-period prices which will be applied to conduct a proof of correctness for a given backtest engine if the here provided tests on specific model candles are successful. Furthermore, we hint to algorithmic considerations in order to allow for a fast implementation of these tests necessary for the proof of correctness.