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

AsanaCrypto 🚀
Coinrule
Published in
4 min readAug 21, 2018

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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%

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AsanaCrypto 🚀
Coinrule

Passionate about Blockchain and Cryptocurrencies. Opinions & posts are my own