Backtest – What is it & How Does it Work?

Unlike what you might think at first, Backtest Lab is a system that constantly calculates buy and sell signals. It never stops working and the majority of the most popular stocks will receive a buy signal nearly every single day since there are 90 different algorithms scanning these stocks daily.

A buy signal is stronger if it has more algorithms buying on the same day. For example, if the stock you are looking at had 1 buy signal on today’s date, that means that only 1 out of 90 logics pointed to buy it, so it’s a weak buy (even if it has a high probabilistic hit percentage). But let’s say another stock has 26 buy signals out of 90 possible. In this case, the buy signal is stronger.

Note that to help with decision making, you also have a moving averages tracker, analysis of triangles and Fibonacci, supports and resistances, and a chart already analyzed every day with all the figures designed to help you, including buy and sell indications based on candlestick patterns.

As the Backtest Lab algorithms are “Buy The Dip” type, that is, they operate against the trend by operating the formation of funds, it is common for the first or second day of operation to go against your purchase. So choosing stocks that have a buy signal in various Backtest Lab algorithms and also have a buy signal in the candlestick patterns observed within the chart increases your chances of success in the first few days.

By the way, at this point, it is important to explain how candlestick patterns work. Let’s say you see a buy “Abandoned Baby” inside a stock chart for today. It could also be another candlestick pattern, they all represent the same logic. In this case, you have an indication that that stock is more likely to rise in a very short time horizon, between 1 and 2 days. Basically, you have 3 exit points after a buy or sell indication by candlestick patterns. Considering that you entered the same day as the signal, in the after-hours.

  1. You can exit at the opening of the next day’s regular trading session. If the opening already brings you a good gain, it is already an exit point and you can guarantee your profit in less than 24 hours.

  2. You can exit at the close of the next day’s regular trading session. Being in profit, why not?

  3. You can exit at some point on the second day of trading, until the closing of the official trading session.

If you don’t make a profit at any of these 3 exit points. Or if you ended up missing the exit point with a profit and now the stock is at a loss, you can still decide to hold the buy if you have strong buying algorithms holding the trade. Here it is nice to add the algorithm you are following to the list of “My Signals” because this way you will be able to follow easily when an exit signal is given.

Note that by using candlestick patterns + Backtest Lab algorithms, you have objective signals to follow, which are information points until a decision is made. Translation: it’s easy and reliable.

But if you are a little more technical and have more knowledge of technical analysis, you can use information from triangles, Fibonacci, trend lines, and support and resistance that are already drawn on the chart to draw more conclusions and improve your entry and exit points. The best part is that our algorithms draw these out for you automatically.

Some important remarks: The Backtest Lab’s 90 algorithms are all bought signals and can take, in some scenarios, weeks to exit a trade. On the other hand, the signals of candlestick patterns are all very short term, 1 to 2 days as mentioned above, so they serve both to trade long and to trade short.

Simple and exponential moving average trackers, based on Fibonacci sequence numbers, help you understand whether a stock is trending strong and long (when all signals point to the same side) or zig-zag (when short-term and long-term signals alternate between buy and sell).

The great thing here is that you don’t waste a single second of your time doing analysis. You just use the analyses, which are updated daily for you with the precision that only algorithms built by artificial intelligence can have, without the fears and judgments that humans would impose if they were the analysts.

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