Backtesting Caveats & Assumptions

This page explains how backtests on this platform are constructed, what assumptions are made, and how results should be interpreted.
Backtests are designed to be consistent, conservative, and comparable, not perfect replicas of live trading.

1. Time Resolution & Execution Model

• Strategy entries and exits are allowed only at 5-minute instants.
• Valid trading window: 9:20 AM to 3:25 PM.
• Intraminute execution is not supported.

This constraint is intentional and helps:

• Reduce noise-based and curve-fitted strategies
• Promote robustness over precision timing

Implication:
Exact intraminute highs/lows or perfect stop-loss fills may not appear in backtest results.

2. Option Price Data (No OHLC Candles)

• Backtests use option chain snapshots with one price per minute.
• OHLC candle data is not used for options.

Implication:

• Sharp spikes or reversals that occurred briefly within a minute may not be captured.
• Stop-losses or targets that were hit intraminute in live markets may be missed.

This approach prioritizes data consistency and reliability over optimistic fills.

3. Strike Selection & Liquidity Considerations

• Strike selection is limited to ATM −10 to ATM +10.
• OTM options are generally liquid and supported.
• Caution is advised with deep ITM options, which may:
  • Have lower liquidity
  • Show missing prices for multiple minutes

Note on ITM definition:

• Calls: ITM strikes are below ATM
• Puts: ITM strikes are above ATM

Implication:
Backtests do not fabricate prices for illiquid deep ITM strikes, which can lead to conservative or incomplete trade paths.

4. Lot Size Assumption

• A fixed lot size (e.g., 65 or the currently defined lot size) is used across the entire backtest period (2020 → present).
• Historical changes in lot size are not applied retroactively.

Implication:
Results are normalized for consistency and comparison, not exact historical replication.

5. Stop-Loss & Target Profit Logic

• Stop-loss (SL) and target profit (TP) are PnL-based, not price-based.
• SL / TP is calculated on the higher of:
  • Total buy-side premium, or
  • Total sell-side premium

This applies uniformly across all strategies, including multi-leg structures.

Implication:
SL / TP behavior may differ from leg-wise price triggers used by some brokers, but ensures consistency across strategy types.

6. Margin Assumptions for Sell Strategies

• Any strategy involving sell legs requires margin.
• Margin requirements have changed over time (SPAN, exposure rules, broker policies).
• The backtester does not simulate historical margin rule changes.

Assumption:
It is assumed that the user meets margin requirements whenever a position is opened.

Implication:
Results reflect strategy performance, not capital or margin constraints.

7. Backtest Period & Filtering

• Backtests are calculated once for the full period: 2020 → present.
• Users can then filter and analyze performance by:
  • Year
  • Quarter
  • Month
  • Weekday
  • DTE (Days to Expiry)

Implication:
Filtering does not change trade logic or execution—only how results are viewed.

8. What Backtests Can and Cannot Tell You

Backtests are useful for:

• Comparing strategies objectively
• Studying drawdowns and volatility
• Identifying structural weaknesses
• Understanding regime sensitivity

Backtests are not:

• Guarantees of future performance
• Proof of tradability at scale
• Substitutes for forward testing or live trading

9. Final Note

Markets evolve. Liquidity shifts. Volatility regimes change.

Backtest results represent how a strategy would have behaved historically under the assumptions above.
They should be used as a research and decision-support tool, not as investment advice or performance assurance.