Back testing in stock screening


Posted by: Invos Research
Published on: January 11, 2023
Back testing in stock screening

Backtesting a stock screening strategy involves simulating the strategy on historical data to see how it would have performed in the past. Here's an overview of the process:

  1. Collect historical data: The first step is to gather historical data on the stocks you wish to screen. This data should include information such as stock prices, trading volumes, financial ratios, and other relevant metrics.
  2. Develop the screening criteria: Next, you will need to develop the screening criteria for your strategy. This will involve defining the specific parameters that a stock must meet in order to pass the screening process.
  3. Screen the historical data: Once you have your screening criteria in place, you can apply it to the historical data to identify which stocks would have passed the screening process in the past.
  4. Evaluate performance: After the screening process, you will need to evaluate the performance of the strategy by comparing the returns of the stocks that passed the screening process to a benchmark or a control group. This will help you to see how the strategy would have performed in the past and whether it would have been profitable.
  5. Optimize the strategy: Based on the results of the backtest, you may want to optimize the strategy by adjusting the screening criteria or changing the weighting of the different metrics.
  6. Forward test: To evaluate the generalization of the strategy, you can forward test the strategy on out-of-sample data to ensure that it generalizes well.

It's important to keep in mind that backtesting is a simplification of the real world, and that future performance may not reflect the results of the backtest.