Backtesting is a way to check how well a trading strategy would have worked in the past. It uses old data to see if the strategy is good.

What is Backtesting?

• It tests trading ideas using past market data
• Helps traders see if a strategy might work, before using real money
• Can be used for any trading idea that can be measured

Why is Backtesting Important?

• Shows if a strategy might make money
• Helps traders decide to use, change, or reject a strategy
• Very useful for complex strategies, like those used by computers

Problems with Backtesting

• Traders must be careful not to cheat when testing
• Should not use the same data to make and test a strategy
• Avoid testing too many ideas on the same data

How to Do Better Backtesting

• Use different sets of data for making and testing strategies
• Test the strategy on data from a different time period
• If results are similar in different tests, the strategy might be good