Test Trading Strategies

Test Trading Strategies

Quick Start

This skill validates strategy performance on historical data before risking real capital. Testing is fast (20-60s), cheap ($0.001), and essential for safe trading.

Load the tools first:

Use MCPSearch to select: mcp__workbench__run_backtest
Use MCPSearch to select: mcp__workbench__get_latest_backtest_results

Basic backtest:

run_backtest(
    strategy_name="MyStrategy",
    start_date="2024-01-01",
    end_date="2024-12-31",
    symbol="BTC-USDT",
    timeframe="1h"
)

Returns performance metrics in 20-40 seconds:

• Sharpe ratio: 1.4 (good risk-adjusted return)
• Max drawdown: 12% (moderate risk)
• Win rate: 52% (realistic)
• Profit factor: 1.8 (profitable)

When to use this skill:

• After building new strategy (validate it works)
• After improving strategy (confirm improvement)
• Before deploying to live trading (ALWAYS)
• Comparing multiple strategy versions
• Testing parameter variations

Critical rule: NEVER deploy without backtesting 6+ months of data

Available Tools (3)

run_backtest

Purpose: Test crypto trading strategy performance on historical data

Parameters:

• strategy_name (required): Strategy to test
• start_date (required): Start date (YYYY-MM-DD)
• end_date (required): End date (YYYY-MM-DD)
• symbol (required): Trading pair (e.g., "BTC-USDT")
• timeframe (required): Timeframe (1m, 5m, 15m, 30m, 1h, 2h, 4h, 6h, 8h, 12h, 1d)
• config (optional): Backtest configuration object:
  • fee: Trading fee per side (default: 0.0005 = 0.05%)
  • slippage: Slippage per trade (default: 0.0005 = 0.05%)
  • leverage: Position multiplier (default: 1, max: 5)

Returns: Performance metrics:

• Net profit: Total profit/loss in USDC
• Total return: Percentage return
• Annual return: Annualized return percentage
• Sharpe ratio: Risk-adjusted return (industry standard metric)
• Max drawdown: Largest peak-to-trough decline
• Win rate: Percentage of profitable trades
• Profit factor: Gross profit / gross loss
• Trade statistics: Total trades, average trade duration, consecutive losses
• Equity curve: Balance over time (for visualization)

Pricing: $0.001 (essentially free)

Execution Time: ~20-40 seconds

Use when: Testing crypto perpetual strategies on Hyperliquid

run_prediction_market_backtest

Purpose: Test Polymarket prediction market strategy on historical data

Parameters:

• strategy_name (required): PolymarketStrategy to test
• start_date (required): Start date (YYYY-MM-DD)
• end_date (required): End date (YYYY-MM-DD)
• condition_id (for single market): Specific Polymarket condition ID
• asset (for rolling markets): Asset symbol ("BTC", "ETH")
• interval (for rolling markets): Market interval ("15m", "1h")
• initial_balance (optional): Starting USDC (default: 10000)
• timeframe (optional): Execution timeframe (default: 1m)

Returns: Backtest metrics:

• Profit/loss
• Win rate
• Position history for YES/NO tokens
• Market resolution outcomes

Pricing: $0.001

Execution Time: ~20-60 seconds

Use when: Testing Polymarket prediction market strategies

get_latest_backtest_results

Purpose: View recent backtest results without re-running

Parameters:

• strategy_name (optional): Filter by strategy name
• limit (optional, 1-100): Number of results (default: 10)
• include_equity_curve (optional): Include equity curve data
• equity_curve_max_points (optional, 50-1000): Curve resolution

Returns: List of recent backtest records with metrics

Pricing: Free

Use when: Checking if backtest already exists, comparing strategies, avoiding redundant backtests

Core Concepts

Performance Metrics Interpretation

Sharpe Ratio (risk-adjusted return):

Formula: (Mean Return - Risk-Free Rate) / Standard Deviation of Returns

Interpretation:
>2.0  → Excellent (very rare for algo strategies)
1.0-2.0 → Good (achievable with solid strategy)
0.5-1.0 → Acceptable (worth testing further)
<0.5  → Poor (likely not profitable after costs)

Why it matters:
- Accounts for volatility (high return with high volatility = lower Sharpe)
- Industry standard for comparing strategies
- More useful than total return alone

Max Drawdown (largest peak-to-trough decline):

Example: Strategy grows from $10k → $15k → $12k
Drawdown: ($15k - $12k) / $15k = 20%

Interpretation:
<10%  → Conservative (lower returns, safer)
10-20% → Moderate (balanced risk/reward)
20-40% → Aggressive (higher returns, higher risk)
>40%  → Very risky (difficult to recover from)

Why it matters:
- Measures worst-case scenario
- Predicts emotional difficulty of holding strategy
- 50% drawdown requires 100% return to recover

Win Rate (percentage of profitable trades):

Formula: (Winning Trades / Total Trades) × 100%

Interpretation:
45-65% → Realistic for most strategies
>70%  → Suspicious (possible overfitting or unrealistic fills)
<40%  → Needs improvement (unless very high profit factor)

Why it matters:
- High win rate doesn't guarantee profitability
- Can have 40% win rate but profitable (if winners > losers)
- Very high win rate (>75%) often indicates overfitting

Common misconception: Higher is always better
Reality: 40% win rate with 3:1 reward:risk is better than 60% win rate with 1:1

Profit Factor (gross profit / gross loss):

Formula: Sum of All Winning Trades / Sum of All Losing Trades

Interpretation:
>2.0  → Excellent
1.5-2.0 → Good
1.2-1.5 → Acceptable
<1.2  → Marginal (risky to deploy)
<1.0  → Unprofitable (losses exceed profits)

Why it matters:
- Simple profitability measure
- <1.5 means small edge, vulnerable to slippage/fees
- Combines win rate and win size into single metric

Example:
10 trades: 6 winners ($100 each), 4 losers ($50 each)
Gross profit: $600, Gross loss: $200
Profit factor: $600 / $200 = 3.0 (excellent)

Total Return vs Annual Return:

Total Return: 50% over 6 months
Annual Return: ~100% (extrapolated to 12 months)

Why both matter:
- Total return: Actual profit over test period
- Annual return: Standardized for comparison across time periods
- Longer test periods more reliable (6-12 months minimum)

Testing Methodology

Minimum data requirements:

Quick test: 1-3 months
- Limited validation
- Use for initial screening only
- High risk of luck/overfitting

Standard test: 6-12 months (RECOMMENDED MINIMUM)
- Captures multiple market regimes
- Sufficient trades for statistical significance
- Industry standard for strategy validation

Robust test: 12-24 months
- Ideal for high-confidence validation
- Includes bull, bear, and ranging markets
- Best for strategies before live deployment

Multi-period testing (essential for robustness):

1. Train period: 2024-01-01 to 2024-08-31
   run_backtest(..., start_date="2024-01-01", end_date="2024-08-31")
   → Sharpe: 1.5

2. Validation period: 2024-09-01 to 2024-12-31
   run_backtest(..., start_date="2024-09-01", end_date="2024-12-31")
   → Sharpe: 1.3

3. Compare:
   Performance similar → Robust strategy ✓
   Performance degraded significantly → Overfit to train period ✗

Market regime testing:

Test strategy across different market conditions:

1. Trending up (bull market): 2023-10 to 2024-03
   → Sharpe: 1.8

2. Trending down (bear market): 2024-04 to 2024-07
   → Sharpe: 0.9

3. Ranging (sideways): 2024-08 to 2024-12
   → Sharpe: 1.1

Analysis:
- Works well in all regimes ✓
- Or works in specific regime (trend-following good in trends)
- Fails in all regimes → Fundamentally broken ✗

Red Flags (Overfitting Indicators)

Warning signs that backtest results may not persist:

1. Unrealistically high win rate (>70%):

Win rate: 82%
Problem: Markets are noisy; >70% suggests strategy memorized past data
Solution: Test on out-of-sample data; expect performance degradation

2. Very few trades (<20 in 6 months):

Total trades: 8 over 6 months
Problem: Not enough data for statistical significance; could be luck
Solution: Test longer period or adjust strategy to generate more trades

3. Excellent backtest, terrible out-of-sample:

Train period (Jan-Aug): Sharpe 2.5
Test period (Sep-Dec): Sharpe 0.3
Problem: Overfitted to training data
Solution: Simplify strategy, reduce parameters, test on more data

4. Performance concentrated in short period:

6-month test: 50% return
- Month 1-5: -5% return
- Month 6: 55% return (one lucky trade)
Problem: Performance driven by single event, not consistent edge
Solution: Analyze equity curve; look for consistent growth, not spikes

5. Strategy complexity doesn't match performance:

Strategy uses 12 indicators, 20+ parameters
Sharpe ratio: 1.3 (only modest improvement)
Problem: Complex strategies should dramatically outperform simple ones
Solution: Simplify; complexity without performance = overfitting

6. Backtest perfect, live trading fails:

Backtest: Win rate 75%, Sharpe 2.3
Live: Win rate 45%, Sharpe 0.6
Problem: Backtest didn't account for slippage, fees, execution delays
Solution: Use realistic fees (0.05-0.1%), slippage (0.05-0.1%), and test on higher timeframes

Pre-Deployment Validation Checklist

Before deploying to live trading, verify:

• Backtest duration: Tested on 6+ months minimum (12+ preferred)
• Sharpe ratio: >1.0 (preferably >1.5)
• Max drawdown: <20% (acceptable risk level)
• Win rate: 45-65% (realistic range)
• Profit factor: >1.5 (sufficient edge)
• Trade count: 50+ trades in test period (statistical significance)
• Multi-period validation: Tested on multiple time ranges with consistent results
• Out-of-sample test: Performed well on data not used for development
• Regime testing: Works in different market conditions (or you understand when it fails)
• Realistic fees: Configured with actual trading fees (0.05-0.1%)
• Realistic slippage: Configured with expected slippage (0.05-0.1%)
• No red flags: Win rate not >70%, sufficient trades, consistent performance
• Equity curve review: Growth is steady, not driven by single lucky trade
• Risk management verified: Stop loss and position sizing are reasonable

If any item fails, DO NOT DEPLOY. Improve strategy first.

Best Practices

Configuration Best Practices

Realistic fees and slippage:

config = {
    "fee": 0.0005,      # 0.05% per trade (Hyperliquid taker fee)
    "slippage": 0.0005,  # 0.05% slippage (liquid markets)
    "leverage": 1        # Start with 1x (no leverage)
}

run_backtest(
    ...,
    config=config
)

Why realistic configuration matters:

Without fees/slippage:
- Backtest: 50% return, Sharpe 2.0
- Reality: Fees eat 5-10% of profit → 40% return, Sharpe 1.5

With realistic fees/slippage:
- Backtest: 40% return, Sharpe 1.5
- Reality: Matches expectation → 38-42% return

Leverage testing:

# Test without leverage first
run_backtest(..., config={"leverage": 1})
→ Sharpe: 1.5, Drawdown: 12%

# Then test with leverage (if deploying with leverage)
run_backtest(..., config={"leverage": 2})
→ Sharpe: 1.4, Drawdown: 24% (doubled)

Risk assessment:
- Leverage amplifies returns AND drawdowns
- 2x leverage doesn't mean 2x Sharpe (risk increases faster)
- Start deployment at 1x, increase cautiously

Comparing Strategy Versions

Systematic comparison:

1. Backtest all versions on SAME date range:
   run_backtest(strategy_name="Strategy_v1", start_date="2024-01-01", end_date="2024-12-31", ...)
   run_backtest(strategy_name="Strategy_v2", start_date="2024-01-01", end_date="2024-12-31", ...)
   run_backtest(strategy_name="Strategy_v3", start_date="2024-01-01", end_date="2024-12-31", ...)

2. Compare all metrics (not just one):
   | Version | Sharpe | Drawdown | Win Rate | Profit Factor |
   |---------|--------|----------|----------|---------------|
   | v1      | 1.2    | 15%      | 50%      | 1.6           |
   | v2      | 1.5    | 12%      | 52%      | 1.8           |
   | v3      | 1.8    | 25%      | 48%      | 2.2           |

3. Analyze trade-offs:
   v1: Baseline (acceptable)
   v2: Better across all metrics ✓ (clear winner)
   v3: Higher Sharpe but excessive drawdown ✗ (too risky)

4. Decision:
   Deploy v2 (balanced improvement without excessive risk)

Avoiding Redundant Backtests

Check if backtest already exists:

1. Before running backtest:
   get_latest_backtest_results(strategy_name="MyStrategy")

2. Review results:
   - If recent backtest exists with same parameters → Use cached result
   - If parameters differ (date range, symbol, timeframe) → Run new backtest

3. Saves time and clutter:
   - Backtests are fast (20-40s) but avoiding duplicates is cleaner
   - Easier to find specific backtest results later

Common Workflows

Workflow 1: Initial Strategy Validation

Goal: Test newly created strategy for first time

1. Check data availability (use browse-robonet-data):
   get_data_availability(symbols=["BTC-USDT"],
   → Verify 6+ months of history available

2. Run initial backtest (6 months):
   run_backtest(
       strategy_name="NewStrategy",
       start_date="2024-06-01",
       end_date="2024-12-31",
       symbol="BTC-USDT",
       timeframe="1h",
       config={"fee": 0.0005, "slippage": 0.0005, "leverage": 1}
   )

3. Evaluate results:
   Sharpe: 1.3 ✓ (good)
   Drawdown: 14% ✓ (moderate)
   Win rate: 51% ✓ (realistic)
   Profit factor: 1.7 ✓ (profitable)
   Total trades: 87 ✓ (sufficient)

4. Decision:
   → Strong initial results
   → Proceed to multi-period validation (Workflow 2)

Cost: $0.001 (~free)

Workflow 2: Multi-Period Validation

Goal: Verify strategy robustness across different time periods

1. Test Period 1 (Train):
   run_backtest(..., start_date="2024-01-01", end_date="2024-06-30")
   → Sharpe: 1.5, Drawdown: 12%

2. Test Period 2 (Validation):
   run_backtest(..., start_date="2024-07-01", end_date="2024-12-31")
   → Sharpe: 1.3, Drawdown: 15%

3. Compare:
   Period 2 slightly worse but consistent ✓
   Sharpe drop: 13% (acceptable variation)
   Drawdown increase: 3% (acceptable)

4. Test Period 3 (Recent):
   run_backtest(..., start_date="2024-10-01", end_date="2024-12-31")
   → Sharpe: 1.4, Drawdown: 11%

5. Analysis:
   Consistent performance across all periods ✓
   No significant degradation ✓
   Strategy is robust ✓

6. Decision:
   → Ready for deployment consideration
   → Review pre-deployment checklist

Cost: $0.003 (3 backtests)

Workflow 3: Before/After Improvement Testing

Goal: Validate that improvements actually helped

1. Baseline (before improvement):
   run_backtest(
       strategy_name="Strategy_original",
       start_date="2024-01-01",
       end_date="2024-12-31",
       ...
   )
   → Sharpe: 1.0, Drawdown: 18%, Win rate: 48%

2. Improve strategy (use improve-trading-strategies):
   refine_strategy(strategy_name="Strategy_original", changes="Add trailing stop", mode="new")

3. Test improvement:
   run_backtest(
       strategy_name="Strategy_original_refined",
       start_date="2024-01-01",  # SAME date range!
       end_date="2024-12-31",
       ...
   )
   → Sharpe: 1.3, Drawdown: 14%, Win rate: 52%

4. Compare (apples-to-apples on same data):
   Sharpe: +0.3 (+30%) ✓
   Drawdown: -4% (-22%) ✓
   Win rate: +4% (+8%) ✓
   → Clear improvement across all metrics

5. Validate on different period (avoid overfitting to test data):
   run_backtest(
       strategy_name="Strategy_original_refined",
       start_date="2023-07-01",  # Different period
       end_date="2023-12-31",
       ...
   )
   → Sharpe: 1.2 (still better than original's 1.0)
   → Improvement is real, not overfitted

6. Decision:
   → Keep improved version
   → Consider further optimization or deployment

Cost: $0.003 (3 backtests)

Workflow 4: Parameter Sensitivity Testing

Goal: Understand how sensitive strategy is to parameters

1. Baseline (default parameters):
   Strategy uses RSI(14) threshold of 30
   run_backtest(...) → Sharpe: 1.3

2. Test parameter variations:
   Create variants: RSI threshold 25, 30, 35

   run_backtest(strategy_name="Strategy_RSI25", ...) → Sharpe: 1.1
   run_backtest(strategy_name="Strategy_RSI30", ...) → Sharpe: 1.3
   run_backtest(strategy_name="Strategy_RSI35", ...) → Sharpe: 1.2

3. Analysis:
   Performance varies only slightly (1.1 to 1.3)
   → Strategy is robust (not overly sensitive to exact parameters) ✓

   vs. High sensitivity:
   RSI25: Sharpe 2.5
   RSI30: Sharpe 1.3
   RSI35: Sharpe 0.4
   → Overfitted to specific parameter value ✗

4. Decision:
   Robust strategy (small variation) → Safe to deploy
   Sensitive strategy (large variation) → Likely overfit, risky to deploy

Cost: $0.003 (3 backtests)

Troubleshooting

"No Data Available"

Issue: Backtest fails with "insufficient data"

Solutions:

1. Check data availability first (use browse-robonet-data):
   get_data_availability(symbols=["YOUR-SYMBOL"],

2. Adjust date range:
   - BTC-USDT, ETH-USDT: Available from 2020-present
   - Altcoins: Typically 6-24 months
   - Use date range within available data

3. Try different symbol:
   - BTC-USDT and ETH-USDT have longest history
   - Start testing on these, then expand to altcoins

"No Trades Generated"

Issue: Backtest completes but zero trades executed

Solutions:

1. Entry conditions too restrictive:
   - Review strategy code (use browse-robonet-data: get_strategy_code)
   - Conditions may never be met simultaneously
   - Example: "RSI < 20 AND price > 200 EMA" (RSI rarely gets to 20)

2. Test on longer period:
   - 6 months may not have ideal conditions
   - Try 12-24 months

3. Adjust thresholds (use improve-trading-strategies):
   - Loosen entry conditions slightly
   - Example: Change "RSI < 25" to "RSI < 30"

"Backtest Takes >2 Minutes"

Issue: Backtest runs for a long time

Solutions:

1. Long date range + high-frequency timeframe:
   - 2+ years on 1m timeframe = slow
   - Solution: Test shorter range or use 5m/15m timeframe

2. Complex strategy with many indicators:
   - Some indicators are computationally expensive
   - Solution: Simplify strategy if possible

3. Normal for prediction markets:
   - run_prediction_market_backtest can take 30-60s
   - This is expected

"Results Look Too Good"

Issue: Sharpe >3.0, win rate >75%, profit factor >5.0

Solutions:

1. Likely overfitted to historical data
2. Test on out-of-sample period (different dates)
3. Check for look-ahead bias (using future data)
4. Verify realistic fees and slippage configured
5. If too-good-to-be-true persists, be very skeptical
6. Start with tiny deployment size to validate in live market

Next Steps

After backtesting strategies:

Improve underperforming strategies:

• Use improve-trading-strategies skill to refine
• Cost: $0.50-$4.00 per operation
• Test improvements with this skill again

Deploy passing strategies (HIGH RISK):

• Use deploy-live-trading skill ONLY after thorough testing
• Cost: $0.50 deployment fee
• Verify all pre-deployment checklist items passed
• Start with small capital, monitor closely

Browse other strategies:

• Use browse-robonet-data skill to see existing strategies
• Compare your results to others
• Learn from high-performing strategies

Summary

This skill provides strategy validation through backtesting:

• 3 tools: run_backtest (crypto), run_prediction_market_backtest (Polymarket), get_latest_backtest_results (cached)
• Cost: $0.001 per backtest (essentially free)
• Execution: 20-60 seconds
• Purpose: Validate strategy performance before risking capital

Core principle: Thorough backtesting (6+ months, multiple periods) is the only way to validate strategies. Past performance doesn't guarantee future results, but lack of past performance guarantees future losses.

Critical warning: NEVER deploy strategies without backtesting. Backtesting is cheap ($0.001) and fast (20-60s). Deploying untested strategies risks real capital and will almost certainly result in losses.

Pre-deployment checklist: Verify Sharpe >1.0, drawdown <20%, win rate 45-65%, profit factor >1.5, 50+ trades, tested on 6+ months, multi-period validation, realistic fees/slippage, no red flags. If ANY item fails, improve strategy before deploying.

Best practice: Test → Improve → Test → Improve (iterate). Each improvement should be validated with new backtest on same data to confirm actual improvement vs. noise.