First Rule of Trading: Risk-management. Our backtesting tool for your trading strategies

Aug 21, 2018

As we believe here at Coinrule, the first and most important starting point in a trading strategy is to put in place some risk management rules. No matter how confident you are about your strategy, you must evaluate how much you could potentially gain and how much you could lose so that you will be able to fully assess the so-called reward/risk ratio.

Imagine one of your friends would suggest starting a trade where you could gain 100 USD if it works well but with equal probability you could also lose 1000 USD if it fails. What would you do? I bet that wouldn’t sound so good to you! In this simple example we just made an assessment of the reward/risk ratio of a trade, in this case, that would equal to only 0.1 (100/1000).

The higher this value will be the more attractive the trade will be, on a risk-adjusted basis. Our ultimate objective is to always get into trades that will have the highest possible reward/risk ratio. That said, this is not so easy to be found, simply because if a trade will feature such an attractive reward/risk profile, many traders will be interested and so its attractiveness will disappear over time. Never forget: RISK-FREE TRADES DON’T EXIST!

“Not taking risks one doesn't understand is often the best form of risk management.” Raghuram G. Rajan

To put in place a reward/risk evaluation can be difficult and time-consuming at times, that’s why one of the main features of the Coinrule platform will be a tool for backtesting your trading strategies. How will it work?

You will be able to decide what will be the parameters that will drive your trading strategy and you will be able to test it with historical data so that it will be easy to evaluate how that strategy would have performed in the past. The result will be a simulation of the value of your portfolio over the testing period, so it will be much more simple to evaluate the profits that would have resulted and the drawdown (i.e. loss) that you would have experienced.

We can never sufficiently underline the importance of fully understanding how devastating a significant drawdown can be for your portfolio. It’s totally reasonable to close trades with a loss (no trader has a 100% infallibility ratio and those that claim so or guarantee you a fixed return are liars!), what we, as traders, have to avoid is to accumulate a total loss that will be virtually impossible to recover from.

Think about it, if an asset loses 30% of its value in one week and the next one it will gain again the 30%, we won’t simply reach breakeven. Let’s make the example that our investment is 1000 USD and we lose in one week 300 USD, a 30% percent gain that we will experience during the following week will produce for our portfolio value only a mere 210 USD in absolute terms. Not exactly the same value we had lost. And it just gets harder and harder to get back to the starting value as the drawdown becomes more severe.

All experienced traders know this effect very well. Those that started trading cryptocurrencies in early January and HODLed until these days probably know better than anyone else what we are talking about.
Sometimes closing a trade with a small loss can be the most profitable trade for our portfolio.

An algorithm trading strategy can take this decision for us based on pre-set parameters, no emotions involved. ONLY RULES make upour trading strategies. You will be able to test these rule before running them live on the markets and analyzing the result, you will be able to simply adjust the parameters over and over again to find the perfect fit for your risk-appetite profile.

Our Backtesting Strategies tool will be available to all our users, including our free-tier users, and it will be the perfect way to make your first steps in algorithmic trading. Just like all other features of our platform, no coding skills will be required! You will be able to set your own parameters and choose the coins to be analyzed.

The perfect tool to start to fully appreciate our platform and to find out what a great friend for your daily trading activities it can become!

What is Coinrule

Coinrule allows you to create trading rules that run automatically across your favourite exchanges.

With Coinrule you can easily develop your own trading rules and strategies and set them up to run automatically. It is the “if-this-then-that” for cryptocurrency trading that allows you to plan your crypto trading rather than having to sit for hours in front of charts. Best of all? No coding skills are required, meaning anyone can use Coinrule.