Backtest Engine (P&L Tracking)

Backtest Engine

A backtest engine simulates a trading strategy on historical data to estimate its profitability. We track portfolio value over time.

Rules

• Signals: 1 = long (buy), -1 = short (sell), 0 = flat (no position)
• Positions are entered at the current bar's price when the signal changes.
• The portfolio value at the next bar is: cash + position * prices[t+1]

Algorithm

Starting with initial_capital:

portfolio = [initial_capital]
position = 0
cash = initial_capital

for t in range(len(signals) - 1):
    sig = signals[t]
    if sig != position:
        cash += position * prices[t]   # close existing position
        if sig != 0:
            cash -= sig * prices[t]    # open new position
        position = sig
    portfolio.append(cash + position * prices[t+1])

Task

Implement backtest(prices, signals, initial_capital=10000.0) that returns a list of portfolio values over time (same length as prices).