Trade Recommendation Backtesting System

Introduction

This project aims to implement a backtesting system for trade recommendation strategies, with a strong focus on order execution logic and risk management parameters. The system is designed to evaluate the historical performance of structured trade recommendations by simulating their execution using past market data.

Each recommendation is composed of a rich set of parameters, closely resembling real-world trading instructions, including order types (e.g., limit, market, stop, and stop-limit orders) and risk controls (e.g., stop-loss, trailing-stop, hold, and take-profit mechanisms).

The recommendations are structured with the following key fields:

Core Fields

• Date: timestamp of the recommendation
• Name: company name of the traded stock
• Equity: the stock or asset ticker under consideration
• Scenario: a description of the market or strategy context, the recommendation rationale

Entry Orders: entry orders define how and at what price a position is opened

• Market Order:
  • indicates immediate execution at current market price
  • since my system operates with daily prices, market orders are executed using the recommendation day's mid-price (which is defined as the average of the high and low prices)
• Limit Order:
  • specifies a desired entry price at which the trade should be filled
  • this can be above or below the current price, depending on the recommendation's intention (to buy on a pullback near support or breakout above resistance)
  • if the limit price is reached outside of regular trading hours (during pre-market trading or a gap at the open), the order is filled with the open price
  • until filled, the order remains active and may be modified

Sell-Limit Orders: sell-limit orders define profit-taking targets; they are, by definition, placed above the entry price (for long positions); in my system, such targets (exit orders) can be defined using any of the following formats:

• Sell-Limit Order Percentage: trigger level expressed as a percentage above the entry price
• Sell-Limit Order Difference: absolute currency-based offset from the entry price
• Sell-Limit Order Exact: a fixed stop price

Stop or Stop-Loss Orders: stop-loss orders (often just called "stops") are used to mitigate potential losses or to protect unrealised gains; depending on trade management, the stop level may be set below or above the entry price; in my system, stop-loss orders can be defined using the following formats:

• Stop-Loss Order Percentage: risk level defined as a percentage from the entry price
• Stop-Loss Order Difference: absolute currency-based stop from entry price
• Stop-Loss Order Exact: a fixed price level at which the position is exited to limit loss

Trailing-Stop Orders: trailing stop is a dynamic stop-loss that moves in the favourable direction only; in the case of a long position, the stop price trails behind rising prices, locking in profits while allowing further upside; in my system, trailing stops can be defined using the following formats:

• Trailing-Stop Order Percentage: the trailing distance is maintained as a fixed percentage below the peak price
• Trailing-Stop Order Difference: a pecific trailing value in absolute currency-based terms that follows price movement, maintaining a fixed distance

Direct Commands: these are immediate actions applied to the position, unless stated otherwise

• Hold: indicates a recommendation to maintain the position without any changes; during the holding period, no stop orders are activated
• Close: signals the immediate closing of an open position, thereby realizing current profit or loss

Flowchart

For the system, I created a flowchart. This shows my logical thinking about orders and their execution.

It is important to note, that the system does not:

• support short selling or short positions, as it operates only long positions
• account for taxes, fees, or transaction costs associated with trading
• specify position sizes, as it operates with a single position at a time
• account for slippage, assuming that orders are filled at the specified prices
• consider dividends, interest, or other corporate actions
• handle multiple positions or complex order types, focusing on single-entry and single-exit scenarios
• support partial fills, assuming that orders are either fully executed or not executed at all
• open and close positions on the same day, as it operates with daily prices

Data

Tables and columns

• data_equites: contains data tables of selected equities, named after the stock's ticker, with the following columns:

  • date: day of trading prices (timestamp for each trading day)
  • open: opening price of the equity for the trading day
  • high: highest price reached by the equity during the trading day
  • low: lowest price reached by the equity during the trading day
  • close: closing price of the equity for the trading day

• data_orders:

  • date: day of trade recommendation
  • company: name of the company for which the recommendation is made
  • ticker: ticker symbol of the equity
  • scenario: description or rationale for the trade recommendation
  • buy_market: indicator (1 or 0) for a market buy order
  • buy_limit: price for a limit buy order (buy only if price reaches this value)
  • sell_limit_pct: take-profit trigger as a percentage above the entry price
  • sell_limit_dff: take-profit trigger as an absolute value above the entry price
  • sell_limit_xct: take-profit trigger as an exact price
  • sell_loss_pct: stop-loss trigger as a percentage below the entry price
  • sell_loss_dff: stop-loss trigger as an absolute value below the entry price
  • sell_loss_xct: stop-loss trigger as an exact price
  • sell_loss_trail_pct: trailing stop-loss as a percentage below the highest price since entry
  • sell_loss_trail_dff: trailing stop-loss as an absolute value below the highest price since entry
  • hold: indicator to hold the position (no exit orders active)
  • sell_market: indicator for a market sell order (close position at current market price)

• data_trading:

  • all columns from data_equites and data_orders
  • buy_price: the price at which a buy order is executed (either market or limit)
  • sell_price: the price at which a sell order is executed (market, limit, or stop)
  • sell_above: the current active take-profit (sell-limit) price
  • sell_below: the current active stop-loss or trailing-stop price,
  • trade_active: boolean flag indicating whether a position is currently open (True) or not (False)
  • trade_price: the price at which the current trade was opened, and closed
  • high_so_far: the highest price reached since the trailing stop was ordered

Recommendations

The recommendations are stored in an excel file, easy to edit and widely understood.

Figures