backtesting.py/doc/examples/Quick Start User Guide.py

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# _Backtesting.py_ Quick Start User Guide
# =======================
#
# This tutorial shows some of the features of _backtesting.py_, yet another Python package for [backtesting](https://www.investopedia.com/terms/b/backtesting.asp) trading strategies.
#
# Firstly, what _backtesting.py_ is not: It is not a data source — you bring your own data. It does _not_ support strategies that rely on multiple orders, hedging, position sizing, or multi-asset portfolio rebalancing. Instead, _backtesting.py_ works with a single asset at a time, a single position at a time (long or short), and the position size is (as yet) non-adjustable, corresponding to 100% of available funds. _Backtesting.py_ is not aware of order types and does not properly simulate, nor can be connected to, a broker. 
#
# As a trade-off, _backtesting.py_ is a _blazing fast_, small and lightweight backtesting library that uses state-of-the-art Python data structures and procedures. The entire API easily fits into memory banks of a single human individual. It's best suited for optimizing position entrance and exit strategies, decisions upon values of technical indicators, and it's also a versatile interactive trading strategy visualization tool.
#
# ### Data
#
# _You bring your own data._ Backtesting ingests data as a [pandas.DataFrame](https://pandas.pydata.org/pandas-docs/stable/10min.html) with columns `'Open'`, `'High'`, `'Low'`, `'Close'`, and (optionally) `'Volume'`. Such data is easily obtainable (see e.g. 
# [pandas-datareader](https://pandas-datareader.readthedocs.io/en/latest/),
# [Quandl](https://www.quandl.com/tools/python),
# [findatapy](https://github.com/cuemacro/findatapy), ...).
# Your data frames can have other columns, but these are necessary.
# DataFrame should ideally be indexed with a _datetime index_ (convert it with [`pd.to_datetime()`](https://pandas.pydata.org/pandas-docs/stable/generated/pandas.to_datetime.html)), otherwise a simple range index will do.

# +
# Example OHLC data for Google Inc.
from backtesting.test import GOOG

GOOG.tail()
# -

# ### Strategy
#
# Let's create our first strategy to backtest on these Google data. Let it be a simple [moving average (MA) cross-over strategy](https://en.wikipedia.org/wiki/Moving_average_crossover).
#
# _Backtesting.py_ doesn't contain its own set of technical indicators. In practice, the user should probably use functions from their favorite indicator library, such as
# [TA-Lib](https://github.com/mrjbq7/ta-lib),
# [Tulipy](https://tulipindicators.org),
# PyAlgoTrade, ...
# But for this example, we define a simple helper moving average function. 

# +
import pandas as pd


def SMA(values, n):
    """
    Return simple moving average of `values`, at
    each step taking into account `n` previous values.
    """
    return pd.Series(values).rolling(n).mean()


# -

# Note, this is the exact same helper function as the one used in the project unit tests, so we could just import that instead.

from backtesting.test import SMA

# A custom strategy needs to extend `backtesting.Strategy` class and override its two methods:
# [`init()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Strategy.init) and
# [`next()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Strategy.next).
#
# Method `init()` is invoked at the beginning, before the strategy is run. Within it, one ideally precomputes in efficient, vectorized fashion whatever indicators and signals the strategy depends on.
#
# Method `next()` is iteratively called by the backtest instance, once for each data point (data frame row), simulating the incremental availability of each new full candlestick bar. Note, _backtesting.py_ cannot make decisions / trades _within_ candlesticks — any trade is executed on the next candle's _open_ (or the current candle's _close_, see
# [`Backtest(trade_on_close)`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Backtest.__init__).
# If you need to trade within candlesticks (e.g. daytrading), instead begin with _more fine-grained_ (e.g. hourly) data.

# +
from backtesting import Strategy
from backtesting.lib import crossover


class SmaCross(Strategy):
    
    # Define the two MA lags as *class variables*
    # for later optimization
    n1 = 10
    n2 = 20
    
    def init(self):
        # Precompute two moving averages
        self.sma1 = self.I(SMA, self.data.Close, self.n1)
        self.sma2 = self.I(SMA, self.data.Close, self.n2)
    
    def next(self):
        # If sma1 crosses above sma2, buy the asset
        if crossover(self.sma1, self.sma2):
            self.buy()

        # Else, if sma1 crosses below sma2, sell it
        elif crossover(self.sma2, self.sma1):
            self.sell()


# -

# In `init()` as well as in `next()`, the data the strategy is simulated on is available as an instance variable
# [`self.data`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Strategy.data).
#
# In `init()`, we compute indicators **indirectly by wrapping them in 
# [`self.I()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Strategy.I)**.
# The wrapper is passed a function (here, our `SMA` function) along with any arguments to call it with (here, our _close_ values and the MA lag). Indicators wrapped in this way will be plotted, and their names, intelligently inferred, will appear in the plot legend.
#
# In `next()`, we simply check if the faster moving average just crossed over the slower one. If it did and upwards, we go long; if it did and downwards, we close any open long position and go short. Note, there is no position size to adjust; _Backtesting.py_ assumes maximal possible position. We use
# [`backtesting.lib.crossover()`](https://kernc.github.io/backtesting.py/doc/backtesting/lib.html#backtesting.lib.crossover)
# function instead of writing more obscure and confusing conditions, such as:

# + {"active": ""}
#     def next(self):
#         if (self.sma1[-2] < self.sma2[-2] and
#             self.sma1[-1] > self.sma2[-1]):
#             self.buy()
#
#         elif (self.sma1[-2] > self.sma2[-2] and
#               self.sma1[-1] < self.sma2[-1]):
#             self.sell()    
# -

# Ugh!
#
# In `init()`, the whole series of points was available, whereas **in `next()`, the length of `self.data` and any declared indicator arrays is adjusted** on each `next()` call so that `array[-1]` (e.g. `self.data.Close[-1]` or `self.sma1[-1]`) always contains the most recent value, `array[-2]` the previous value, etc. (ordinary Python indexing of ascending-sorted 1D arrays).
#
# **Note**: `self.data` and any indicators wrapped with `self.I` (e.g. `self.sma1`) are **NumPy arrays for performance reasons**. If you need `pandas.Series`, use `.to_series()` method (e.g. `self.data.Close.to_series()`) or construct the series manually (e.g. `pd.Series(self.data.Close, index=self.data.index)`).
#
# Let's see how our strategy performs on historical Google data. We begin with 10,000 units of cash and set broker's commission to realistic 0.2%.

# +
from backtesting import Backtest

bt = Backtest(GOOG, SmaCross, cash=10000, commission=.002)
bt.run()
# -

# The
# [`Backtest`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Backtest)
# instance is initialized with data and a strategy _class_ (see API reference for additional options).
#
# When
# [`Backtest.run()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Backtest.run)
# method is called, it returns a pandas Series of simulation results and statistics associated with our strategy. We see that this simple strategy makes 600% return in the period of 9 years, with maximal drawdown 33%, and with longest drawdown period spanning almost two years ...
#
# [`Backtest.plot()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Backtest.plot)
# method provides the same results in a more visual form.

bt.plot()

# ### Optimization
#
# We hard-coded the two lag parameters (`n1` and `n2`) into our strategy above. However, the strategy may work better with 15–30 or some other cross-over. **We define the parameters as optimizable by making them [class variables](https://docs.python.org/3/tutorial/classes.html#class-and-instance-variables)**.
#
# We optimize the two parameters by calling
# [`Backtest.optimize()`](https://kernc.github.io/backtesting.py/doc/backtesting/backtesting.html#backtesting.backtesting.Backtest.optimize)
# method with each parameter a keyword argument pointing to its pool of values to test. Parameter `n1` is tested for values in range between 5 and 30 and parameter `n2` for values between 10 and 70, respectively. Some combinations of values of the two parameters are invalid, i.e. `n1` should not be _larger than_ or equal to `n2`. We limit admissible parameter combinations with an _ad hoc_ constraint function, which returns `True` (admissible) whenever `n1` is less than `n2`. Additionally, we search for such parameter combination that maximizes return over the observed period. We could instead choose to optimize any key from the returned `stats` series.

# +
# %%time

stats = bt.optimize(n1=range(5, 30, 5),
                    n2=range(10, 70, 5),
                    maximize='Equity Final [$]',
                    constraint=lambda p: p.n1 < p.n2)
# -

stats

# We can look into `stats._strategy` to access the Strategy instance and its optimal parameter values (10 and 15).

bt.plot()

# Strategy optimization managed to up its initial performance _on in-sample data_ by almost 70% and beat 
# [buy & hold](https://en.wikipedia.org/wiki/Buy_and_hold).
# In real life, however, **always take steps to avoid
# [overfitting](https://en.wikipedia.org/wiki/Overfitting)**
# before putting real money at risk.
#
# Learn more by exploring further
# [examples](https://kernc.github.io/backtesting.py/doc/backtesting/index.html#tutorials)
# or find more program options in the
# [full API reference](https://kernc.github.io/backtesting.py/doc/backtesting/index.html#header-submodules).