What type of tick data is best for historical simulation.

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931

Its possible to use historical quote or historical trade data..
What would be better for backtesting more accurately?
 
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I would guess that it depends on the instrument you want to backtest. If the number of historical trades is few and far between then it might be better to use the quote data (historical bid and ask prices). However, if it is a very liquid instrument with lots of trades then it might be more accurate to use the actual trades which occurred as data for the backtest.

Edit: this changes the topic to determining what is "few" and what is "liquid". This depends on how frequent your trading strategy would trade in a certain period of time.
 
Can quote data be considered more valid for pending position entries and SL + TP type order exits?

In other words for limit order type.

Targeting sp500 and similar lower spread stocks.

Broker is IBKR atm , id assume quote data is used for SL, TP fills.
 
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I use trade data but sometimes it’s so bad and “false” due to dark pools and late reported trades that I wish I had bid/ask data just to validate the trade data.
You’ll run into hundreds of problems that you will be solving, so what you will need will also depend on each problem, trading parameters and style, trading speed, etc.

Though there is no such thing as “backtesting more accurately”. Most “accuracy” results in overfitting and false alpha where you spend time tinkering and adjusting things that aren’t scalable and don’t matter in the grand theme of things. The market doesn’t provide “accuracy” and if you can’t make money without accuracy then you won’t make money at all. Unless you’re doing HFT and fighting with sophisticated bots and algos, which I don’t think you’ll want to.
 
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guru said:
I use trade data but sometimes it’s so bad and “false” due to dark pools and late reported trades that I wish I had bid/ask data just to validate the trade data.
You’ll run into hundreds of problems that you will be solving, so what you will need will also depend on each problem, trading parameters and style, trading speed, etc.

Though there is no such thing as “backtesting more accurately”. Most “accuracy” results in overfitting and false alpha where you spend time tinkering and adjusting things that aren’t scalable and don’t matter in the grand theme of things. The market doesn’t provide “accuracy” and if you can’t make money without accuracy then you won’t make money at all. Unless you’re doing HFT and fighting with sophisticated bots and algos, which I don’t think you’ll want to.
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If not considering over optimization , what method would be most similar to live market?
 
931 said:
If not considering over optimization , what method would be most similar to live market?
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For market orders I assume worst price during a specific bar, whether 1 sec, 15 sec, 1 min, or even 5 min, as I analyze strategies at different time intervals/bars.
This not only tunes out false alpha from bots and general price fluctuations and market inaccuracy, but also is similar to top traders who may react to price changes in seconds or minutes and need to instantly make a trade at the current price, without trying to improve that price further.

For limit orders, I only check whether the price reached my limit within the above bars, and make sure my volume is a % of traded volume.
 
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guru said:
For market orders I assume worst price during a specific bar, whether 1 sec, 15 sec, 1 min, or even 5 min, as I analyze strategies at different time intervals/bars.
This not only tunes out false alpha from bots and general price fluctuations and market inaccuracy, but also is similar to top traders who may react to price changes in seconds or minutes and need to instantly make a trade at the current price, without trying to improve that price further.

For limit orders, I only check whether the price reached my limit within the above bars, and make sure my volume is a % of traded volume.
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For constructing bars would quote data be wrong?
 
931 said:
For constructing bars would quote data be wrong?
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Not sure, as I don't have or use that data (I have it in live trading, but not historically).
Generally I think it could be useful together with trade data, but on its own may not be as useful without volume and actual trades. We also know that bots post fake bids and can withdraw them at any time, so a quote may not always be valid.
 
guru said:
Not sure, as I don't have or use that data (I have it in live trading, but not historically).
Generally I think it could be useful together with trade data, but on its own may not be as useful without volume and actual trades. We also know that bots post fake bids and can withdraw them at any time, so a quote may not always be valid.
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Exactly why you should use a simulator. The quotes are not fake but yes they can be withdrawn
 
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