Traditionally, backtesting as Investopedia suggests the general method for seeing how well a strategy or model would have done ex-post. Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data. If backtesting works, traders and analysts may have the confidence to employ it going forward.
You might be wondering, what does backtesting may have to do with arbitrage trading? How can we backtest an arbitrage trade? As confusing as it may initially sound, we’ve discovered a great way to plan ahead winning trades. The AE team refers to the term “Backtesting” when describing an analytical method, made for identifying multiple, favorable, historical time periods, where spread had narrowed just enough & remained in place for a trader to have enough time to make a profitable trip back.
A lot of times arbitrage carries less risk compared to traditional day trading, however, creating a roadmap is a crucial step in preventing unfavorable results.
All too often, however, complete and immediate road trips are hard to come across. The competing companies in the arbitrage space do not talk about this, but, the most challenging part of arbitrage trading involves profitably moving the coin back to the next exchange for further exploration of arbitrage opportunities.
The ultimate goal is to find a profitable path to another exchange, by buying & moving the altcoin, so that it can be traded for fiat when the spread contracts again.
As painful as it may be, withdrawing cash from certain exchanges may not always be the most optimal or straightforward process for everyone, due to the potentially high fees, regulations as well as time constraints. Hence, in situations when funds aren’t able to be immediately withdrawn, buying an altcoin & attempting to trade it at another exchange for fiat might be the only reasonable exit strategy.
Arbitrage backtesting is designed to display historical windows of opportunity for a potential exit strategy. The report is intended to illustrate a list of matching pairs between exchanges while graphically indicating historic temporary openings where the spread contracted just enough for any trader to be able to find a profitable path to another destination.