For the software to conduct this process, it must be fed copious amounts of historical data, including that for:
- the specific period you are looking to back-test your portfolio in,
- the historical prices of your assets at that point in time, and
- the market data needed for the strategy throughout that period.
For the process to be accurate, investment managers require the highest, lowest, open, and close prices and volumes traded for each asset at various points throughout the day at a one-minute timeframe.
Certain off-the-shelf portfolio back-testing software gives you these at five points of the trading day, namely the start, the end, the top, the bottom, and the total volume mark. Nevertheless, this does not really offer a real-life representation of market prices, especially during periods of high market volatility.
For that reason, one-minute-level historical highest, lowest, open, and close, volume traded for each asset is recommended.
The ideal data source needs to also include the bid-and-ask prices of the market at one-minute timeframes. During difficult market conditions, the spread is typically wildly different to the standard or the average, so working with book prices allows for better back-testing of the strategy behaviour.
The best solution here is to work with the tick data of the traded prices and the market book, but this requires large amounts of data to be processed. Due to this, the computational power required is high, and so are the costs associated with it – both in terms of time and hardware resources.