Explainer
Backtesting a strategy for a prop firm eval
Write down your program’s limits, run your rules with real costs, read the deepest fall in R, the lowest day and longest losing streak, then test again.
Updated
Start with the limits
Before you run anything, copy your program’s limits out of its rulebook, one plain sentence each. You need the overall loss limit and whether it trails, the daily loss limit and when the day resets, any consistency rule, and the contract limit.
Do not use limits quoted from somewhere else. Programs differ, and a backtest against the wrong number tells you nothing about your program.
- R
- A trade’s result in units of its initial risk, the distance from entry to stop. A trade stopped at its initial stop is −1.00R.
- Max drawdown
- The largest fall of cumulative net R below its running peak, in exit order, starting at 0.
- Longest losing streak
- The most losing trades in a row.
- Held-back months
- Months set aside from the results so part of the history was not used to build the rules.
Write the rules so they cannot be misread
An evaluation is no place for a rule with two readings. Name the market, the entry, the stop, the target and the exit if neither is hit. Say what happens when a bar opens beyond your stop. In our method that trade is skipped and listed as skipped.
Turn each limit into a number of R
Divide each dollar limit by the dollars you risk on one trade. The result is how many full stops that limit holds. Do it for the overall limit and for the daily limit.
This is the step that links the rulebook to the backtest. R is the same whether you trade one contract or several, so the comparison does not change with size. Size only decides how many dollars one R is.
Turn each limit into a number of R. Then check whether the run’s deepest fall in R would have stayed inside it.
Run it with costs and read the numbers
Set the costs before the first run. Commissions and fees vary by broker; a backtest should use your own.
Then read four things: the trade count, the max drawdown in R, the longest losing streak, and the lowest day. Group the trades by trading day to find the lowest day. Compare each with its limit.
Read the trades too, not only the totals. A trade that surprises you is worth understanding before you trust the figures.
Keep months back, then change one thing
About 30% of months, spread across every year, are held back for each strategy in our service, and any trade open in a held-back month is dropped from the results. Those months are the check on rules you adjusted along the way.
If a number is too close to a limit, change one rule, such as the stop distance or the number of trades per day, and run again. Each run is a version. A version is $19.
What this does not tell you
A backtest is a simulation on past data. It does not predict an attempt, and it cannot show the pressure of a live day. Use the Trade Lab replay, free with an account, to practise the decisions bar by bar, and treat a backtest as one input.
Questions and answers
Can I backtest a strategy against a trailing drawdown?
Yes, in R. Put the limit in R, then compare it with the largest fall of cumulative net R below its running peak in the run.
What should I look at in a backtest for an evaluation?
The trade count, the max drawdown in R, the longest losing streak and the lowest trading day, each against the matching limit.
Which markets can you backtest for this?
CME futures: ES, MES, NQ, MNQ and gold (GC). Gold is ordered on its own, never together with an index.
How much does it cost?
A version is $19.
Does a backtest tell me I would have passed?
No. It shows how the rules behaved against limits you set in R, on past data. Simulated results do not represent actual trading.