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Day Trading Setup: Backtesting with Indicators

Backtesting using indicators can help you identify a potentially effective day trading setup and serves as a starting point for many traders. There are many ways to incorporate trading indicators into backtesting. Below we will explore a methodology and an example of a trade setup.

Backtest Trading Indicators

The first step for many traders to determine the validity of a trading idea is to backtest the setup versus historical market data.

Backtesting provides a bird’s eye view of how your setup may perform in a real-time trading environment. Testing various trading indicators and observing how these can be utilized in conjunction within a trading setup is an excellent way to get started and get different ideas brewing.

Set Up a Day Trading Strategy for Backtesting

The following steps provide a quick outline of the initial steps in setting up your day trading strategy for testing. help you start the process of setting up a day trading strategy:

Pick a financial instrument to test

  • Ex. S&P 500 futures (ES)

Pick two of your favorite trading indicators

Through your trading platform

  • Set the date range for the financial indicator to look back one year
  • Overlay the indicators on top of the financial instrument

Decide on a set of parameters that have to be met for both indicators in order to potentially trigger a trade entrance

  • Ex. Below 30 on the Relative Strength Index and passing above the 21 Day Moving Average

Decide on a set of parameters that have to be met for both indicators in tandem to exit the hypothetical trade

  • Ex. Above 70 on the Relative Strength Index and passing below the 21 Day Moving Average

Day Trade Setup Example

  • Both buy conditions (entrance) being met using two indicators – Bollinger Bands® & Relative Strength Index (RSI)
  • Both sell conditions (exit) being met using two indicators – Bollinger Bands® & Relative Strength Index (RSI)

Automating Your Trading Strategy

By programming your favorite ideas into an automated trading strategy through your platform, they can react to market conditions as you normally would, but without any hesitation or overthinking.

Interested in building and testing your trading strategies? The NinjaTrader platform has you covered. Download our FREE software and begin today!