I currently backtest my option buying strategies on data since January 2023.
Is that enough? Or should I go further back? I do have NIFTY/BANKNIFTY 1-minute options OHLCV data since 2019. But it is generally difficult to come up with strategies that work on such a long period.
Unless you can keep adapting to changing markets with new systems, such a short window is not very useful. Even if system happens to work overall, you will not know historical risk that the system had to face and might become too optimistic. Perhaps a group of such systems based on current regime might work, but i don’t trade that way so cant say for sure - and you will still need to test over large sample.
A counter to this can be that markets may have changed permanently and this short window edge will become future long term edge. But i would find it hard to put good money for something like this and at least will need clear cut rules to stop system and some reason to believe that markets have changed for good.
While I don’t trade options, for my own trading i prefer 10+ years of data over which system should work. A working system will still have ups and downs as markets become favorable and not, but overall it will work with a decent upward equity curve.
Now one way to work with options is to have an edge in underlying and then execute via options. With that you can test the underlying edge over large sample and execution stuff over whatever options data is available. That looks good enough to me.
Thanks for such a detailed reply!
I think I can extend my backtesting period to 2021. Can’t go before that because 2020 was weird and pre-2020, there wasn’t a lot of volume.
Ignoring data is a major mistake, nothing weird about 2020. We cant assume that markets will always be like post 2020, when they change you might suffer.
I wouldn’t trade a system with only few years of data, but anyway - at least assume future DD would be much worse and multiple times what you see in data. Hard to say how much worse, but better be conservative.