There are many arguments about the minimum number of backtesting trades you need to prove that a trading strategy actually works.
Some say 30 trades… others say 100.
So who is right?
The minimum number of backtest trades a trader needs to prove that the trading strategy is working will depend on the time frame in which the strategy is traded, how often the strategy is traded, and how confident the trader is in the backtesting results.
In other words… it depends.
Since there is no one number that works in all cases, I will explain all the factors to consider when figuring out what the right trading number is for you.
Let’s get into it…
The Myth of 100 Backtesting Trades
Before I get into what you need to prove a trading strategy works, I need to address a HUGE backtesting myth.
I don’t know where this myth came from, but it’s one of the dumbest ideas in trading that many trading educators still perpetuate.
So if you’re wondering why your trades aren’t profitable, then this video will help you understand why at least 100 backtesting trades don’t make sense, in most scenarios.
If you prefer the text version, it is provided after the video.
Because a minimum of 100 backtesting transactions is completely ridiculous
Daylight Savings Time, Fahrenheit temperature measurement and at least 100 backtesting transactions.
What do these things have in common?
All this makes no sense.
Now, in all fairness, I can understand why someone might think 100 backtested trades is a good number to use.
It seems about right…at least at first glance. You want to have a lot of data and 100 transactions seems like a big number.
But when you really think about it, you can’t use 100 transactions because it’s usually too big or too small.
It depends on the time frame you are trading.
Here are 2 examples from opposite ends of the spectrum to illustrate my point.
When 100 transactions are too small
If you are back testing a day trading strategy, 100 trades is not nearly enough to see if a strategy is reliable.
Let’s say you are backtesting a day trading strategy that averages 1 trade per day.
There are approximately 20 trading days per month. So if you have 20 trades per month, 100 trades will only represent 5 months.
This is not nearly enough to see how the strategy has performed in various market cycles.
For example, here is the monthly chart of the S&P 500 from 1968 to 2024.
The thin vertical green box in 2013 represents about 5 months.
As you can clearly see, this is a very, very small sample of the total volume of historical data.
Therefore, if you were only testing during this short period of time, you will not know how well the strategy works in volatile markets, sideways markets, trends and quiet markets.
You may experience a very good period for your trading strategy or you may catch a bad period.
In any case, you won’t have an accurate picture of how well the strategy works over a long period of time.
When 100 transactions are too many
Now, if you are trading a longer time frame like the daily chart, then 100 trades may not even be possible.
You may not have 100 trades in 20 years.
But what if your strategy only takes 80 trades during that period and makes a lot of money in just a few trades?
This is common with trend following strategies.
They generally only generate a few trades a year, with 2 or 3 monster trades making up for all the lost trades, with a huge profit to boot.
In that case, would you insist on having at least 100 backtesting transactions?
Probably not.
Another scenario is if you are backtesting a fairly new market.
It can be a cryptocurrency or a fairly new stock.
When you backtest these markets, you may only get 30 trades.
so what are you doing
Well, it comes down to this…
How to know which number is right for you
Now that you understand why 100 transactions cannot be used as a minimum number of backtesting transactions, the question becomes:
What is the best number of backtesting transactions?
I wish I could give you a single, definitive number, but it doesn’t work that way.
As with many things in trading, it really depends on the situation.
Traders need to feel confident that backtesting results show that the strategy will work in many different market conditions.
So make sure you have backtesting software that gives you detailed statistics about your backtesting. This is a big key to understanding how reliable a trading strategy is.
If you day trade, you don’t need to test your strategy for every day for over 20 years. But you need to test chunks of time in different market conditions.
You may want to double-check a 1-year period in each of the following purchase conditions:
- Volatile market
- Quiet market
- Strong market trends
- Weakly market trends
- Lateral market
On longer time frame charts, such as the daily chart, you may want to test your strategy on multiple markets to gain confidence.
In Forex, you can try many currency pairs.
With stocks, you could test the strategy with many different individual stocks.
You get the idea.
Since there is no set minimum number of trades, you should rely on how you do touch about the results.
This will take some practice.
So when you first start out, don’t go live trading right away.
Even if you I think so that you are sure about a strategy, start trading it on a demo account first. This is called forward testing.
If you get similar results in demo, then you can start trading with real money.
After a few cycles like this, you’ll get a feel for what good backtest results look like, and at that point, you might want to skip the demo trade step.
conclusion
So you can calculate how many backtesting transactions you need to prove it yours the trading strategy works.
You can’t say there is a set minimum number of trades because it will really depend on the situation.
But if you follow the instructions in this tutorial, you’ll quickly get a feel for how many trades you need in each case.
