Do you want to know the difference between Backtesting and Scenario Analysis? It’s a challenge for traders to create an ideal trading strategy where all trading entries or exits take place in a way that’s beneficial for a trader.
In order to test the accuracy of a trading strategy, there are few techniques that reveal the true colors of a developed strategy.
Backtest and scenario analysis techniques can both be used for the evaluation of a system and for analysis purposes. Irrespective of having the same objectivities both backtest and scenario analysis are totally opposite to each other.
What is the Difference Between Backtesting vs. Scenario Analysis?
Backtesting is a strategy that uses historical data to evaluate the trader’s trading strategy whereas scenario analysis employs hypothetical data stimulating all various possible outcomes. For example, scenario analysis considers all changes that can affect the portfolio’s securities such as a change in the rate of interest, etc.
In other words scenario analysis is used to evaluate the change in the portfolio’s value with respect to the unfavorable event of the market and might also be used to analyze hypothetical worst-case scenarios.
Misc. Trading Techniques for Simulating a Trading Strategy
There are few other trading strategies that are employed by traders to evaluate the accuracy of a trading strategy. Ideal Backtesting Scenario, Forward Performance Testing & Scenario Analysis, etc. are few very well-known trading methods all over the world to confirm system effectiveness.
Click here: If you want to learn more about Backtesting and Forward performance testing.