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Basic backtesting in Excel:

Conditions, logic, and stats
by AdamHGrimes | Nov 2, 2015 | Trading tools | 3 Comments

Pat yourself on the back if you’ve come this far in the little backtesting mini-course. After
many posts, we’ve basically gotten data into a spreadsheet and calculated some moving
averages. You probably aren’t blown away by what we’ve accomplished, but think again:
we’ve laid the foundation for doing some really good solid work, and have touched on some
of the major issues you were likely to encounter along the way. We’ve done a lot more than
you might think from that little spreadsheet, and now it’s time to add a few more tools.

Make sure you have the spreadsheet as it stands in the pic at the end of the last post. (Yes, I
could just upload it, but then you wouldn’t do the work yourself!) If you have trouble
following along today, check your starting point with that sheet.

Evaluating simple conditions

Remember the if statement? =IF(condition to
test, show this if true, show this if false) We can
use this in a cool way do some quick and dirty
market stats. Let’s say we want to know what
percentage of the time the SPY is above the 20
period moving average. We put that test into the
‘condition to test’ eld, and have the formula
return a 1 if true and a zero if false. So, in cell I24,
use this formula =IF(B21>G21,1,0) and copy it
down to the bottom of the sheet. (B21 should be
the SPY closing price for the day, not the return, and G21 is the 20 period MA of the closing
prices.)
This column is now something we can call an indicator variable. Be clear that this is not
“indicator” like technical analysis, but an indicator variable is a statistics tool that gives
speci c values if something is true or false. Since we are asking “what percentage of the
time is close above the MA” then we can simply average this column, using the formula
=AVERAGE(I:I) put anywhere in the sheet. The average formula ignores text or blank
spaces, and this is why we have to give it a zero when the condition is false.

In this case, we should nd that the close is above the 20 period MA 62.6% of the time. Your
number might be a bit different if you have different dates in your sheet; mine goes from
8/1/05 – 10/19/15, but you should have roughly the same answer.

A note on references: cell references work with column/row format, e.g., D3, U61, AB3.
Ranges are two cells with a colon between them: A1:A3 is a set of three cells in the column
A. A1:Z26 is a 26X26 grid of cells. When we want to refer to entire columns, we use the
format A:A, which means the entire column A. In general, you probably want to avoid those
full column references, but they are a quick and dirty way to be sure you haven’t missed
something in the formula.

Now, think
Were you surprised to nd the close was above the average that much more than half the
time? If so, think a bit more deeply on averages, and why it could be true that far more than
half the prices are above a moving average. Would the answer be different for a moving
median, or would some of the same reasons apply? You can test this too with the
=MEDIAN() formula.

When you calculate basic stats take a minute and look at them and think about what you’re
seeing. Do they make sense or not? If they don’t then trace your steps and see if you can
nd an error. Sometimes there may be no error, and the “problem” is with your perception
and/or assumptions. Drilling down into these situations and thinking through the steps can
be a really fantastic learning experience.

(As an aside, I wrote this short book, Quantitative Analysis of Market Data: a Primer, to
help people think through these issues. This is a book that really is written for someone just
beginning to grapple with the basics–it’s a primer, so if you have a strong quantitative
background there will probably not be anything new for you here. If you’re more on the
beginning steps of your journey, trying to think through issues and understand what data
might mean, then I wrote this book for you. It’s available for free in the Kindle Unlimited
program, you also can get a free pdf of it if you sign up for my mailing list (upper right corner
of my blog), or you can get a hardcopy. The hardcopy was my rst experience with layout
and book design, and I’m pretty pleased with how it turned out. Check it out if you like to
hold a paper book in your hands!)
 I made a simpli cation here that will cause you problems down the road. I
tested for the condition “is above MA” and gave a 1 if true and a 0 if false. The
problem with this is that there’s a third condition: price can be EQUAL to the
MA. To do this work correctly, we should not assume that the percentage of the
time price is below the MA = (1 – percentage of time above). This is especially
true if, for instance, we want to know how many times something closes up for
the day/week/whatever; we need to account for the unch periods. There are a
few ways to solve this, but probably the easiest is to do the “is above” test as
I’ve shown it, and then do an “is below” in a separate column that speci cally
tests those conditions. Anything not caught in those two buckets is almost
certainly equal to (or unch), but do check this assumption in all your work.

More complex conditions

What if we want to test more complex conditions, such as asking how many times the S&P
500 is up two days in a row? Excel provides the AND(), OR(), and NOT() formula (and an
XOR() formula in the newest version of Excel.) These tools allow you to apply logic to
basically construct any test you want. Very complex tests and conditions are essentially
built from AND, OR, and NOT evaluations; if you’ve never worked with simple logical
conditions before, it’s easy to underestimate their power.

In this case, there are few ways we can answer the question, and it also depends a bit on
style. How deeply do you want to nest conditions in your formulas? One way to do this
would be to put this formula in any cell in row 21 =IF(AND(B21>B20,B20>B19),1,0); make
sure you understand what that formula does and how it works, and see that the AND() lives
inside the condition part of the if formula. If this is all new to you, make sure you
understand why every () and , is where it is–everything matters.

Play with this idea for a few days, and experiment with different ways to solve the problem.
It would be nice to have some way to generalize the formula, so we can test for N days up
(or down). There are ways to do this, but you could look into the OFFSET() function to start.

You learn by doing. It’s not enough to read some posts or look at some examples; the only
way to build competence is by manipulating the program, making mistakes, getting
confused, and working through those tough spots. Do this, and you’ll be well on your way to
having a good skill set to do some basic market analysis.

The next post will be important, so make sure you’re comfortable with everything in this
post before you move on.

3 Comments Market Musings 

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Chris
3 years ago
− ⚑

Great tutorial, Adam! I think you have a typo in this lesson, don't you mean I21 instead of
I24 in this line:

"So, in cell I24, use this formula =IF(B21>G21,1,0)"

△ ▽ Reply

Olena
3 years ago
− ⚑

Hi Adam,thanks a lot for excel backtesting. It's really helpful!

Let me ask you more specific question on MA20. I am running this test on 100 stocks
and some of stocks have missing data even more than 20 days. Some of them were not
traded over several days, years, some were suspended from trading. When I upload data
into Stata and run MA20 it calculates MA treating missing values as legitimate
observations. As a results that my estimates are wrong.

I cannot delete manually missing observations as I lose lots of them. What I suggest to
do is to ignore missing values and calculate moving average as there were no missing
values. Is it the right thing to do?

May you recommend the most intelligent way of fixing this problem?
Thank you.

see more

△ ▽ Reply

Adam Grimes > Olena

− ⚑
3 years ago
A few possibilities, depending on what you're trying to accomplish:

-You can delete missing observations (with the drop and if commands in stata)
-You can use the previous value to fill in missing observations
-You can interpolate a new value
 You can interpolate a new value

None of these are perfect solutions. The perfect solution would be to have indicative
data (bid/ask quotes) from active markets even when they don't trade, but that
solution doesn't always exist, for a number of reasons.
1△ ▽ Reply

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