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I once did a backtest of a very interesting strategy that involved frequently (every few days) trading credit default swaps. If I assumed that I could execute at mid, then the strategy made decent returns. However if I assumed 5 bps bid-ask spread (i.e. only 2.5 bps above and below the mid - somewhat optimistic), then the strategy lost money. My advice to ...


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"What are more appropriate way to test it with real-world data? Also, can you suggest the next steps to make it more realistic?" Pick a tradable instrument (e.g. SPY rather than S&P500), eliminate look-ahead bias (e.g. trade at the next day's open rather than the close), take into account transaction costs and financing costs, estimate market ...


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