How to create stock screeners and portfolio backtests using Xstocks

Backtesting Explained

Before we dive into the nitty-gritty of Xstocks, let's understand what backtesting is. Backtesting is like a time machine for your investment strategy. It lets you see how your chosen strategy would have performed in the past under various market conditions. It's not about predicting the future; it's about learning from the past. In essence, backtesting helps you gauge the effectiveness of your investment approach by running it through different market scenarios.

How Backtesting Works in Xstocks

Xstocks relies on end-of-day data from major exchanges like NSE, BSE, and US stock markets. To start screening stocks, follow these steps:

1. Launch Xstocks: Begin by opening the "Create Screen Wizard" on Xstocks.
2. Basic Parameters: Start with the basics. Specify parameters such as:
   • Market capitalization of the stocks you're interested in.
   • Minimum daily trading volume.
   • Minimum stock price (to filter out penny stocks).
   • Primary filtering criteria, such as top performers, worst performers, low volatility, low P/E ratio, or even advanced factors like the Sharpe ratio.
3. Additional Criteria: Customize your screening further by adding criteria such as:
   • Specific industries to include or exclude.
   • The number of stocks to select when running your screen.
   • Rebalancing frequency (how often you want to update your portfolio).
   • Create a custom list of tickers to choose from.
   • Set ranges for historical returns, P/E ratios, P/B ratios, operating margins, EBITDA ratios, and more.
4. Run Your Screen: Once you've set your conditions, hit the "Save and See Results" button in the wizard. Now, sit back and watch the magic unfold!
5. Review Results: Xstocks will run your strategy through the past 11 years and display the results within minutes. Keep an eye on two crucial metrics:
   • Total return: Higher is better.
   • Sharpe ratio: Higher is better.
6. Execute Trades: With your results in hand, you can either execute these trades as a basket through your broker's platform or use this opportunity for further research.
7. Rebalance: Xstocks' portfolios are equally weighted, and you'll receive email notifications for rebalancing.

A Simple Example: Small Cap Momentum Strategy

Let's illustrate with a straightforward example. Suppose you want to invest in small-cap stocks with high momentum and rebalance weekly:

1. Strategy Name: Give your strategy a catchy name, like "Best Small Cap Momentum Picks."
2. Market Cap Range: Set it between Rs. 10,000M (approx. $200M) and 200,000M (approx. $2B).
3. Sorting: Choose to sort by Sharpe ratio (the default).
4. Rebalance Frequency: Opt for a weekly rebalance with 5 trading days.

Additional Conditions: Fine-tune other parameters like stock price range, volatility, or volume as needed.

In our example, your portfolio may have generated a remarkable 2,000% return with an annual return of 32% and a volatility of 27%. The Sharpe ratio sits at 1.0, which is a solid result. Keep in mind that you'll need to actively manage the portfolio, consider transaction fees, and account for short-term taxes. Despite these factors, it's still a more appealing option than traditional mutual funds or PMS managers.

If you want to see more details of backtesting a portfolio, please watch our video about portfolio screening and backtesting.

In the world of investing, Xstocks is your trusted sidekick, helping you uncover hidden gems and make informed decisions. So, let the screening begin, and may your investment journey be filled with success! 🚀💰