DEFINITION

Backtesting

Running a trading strategy against historical market data to evaluate its performance before risking real capital. Backtests are subject to curve-fitting bias and should be followed by forward testing.

In depth

A backtest tells you how a strategy WOULD have performed on past data. The risk is overfitting: tweaking rules until the backtest looks great on history but fails in live markets. Robust backtests use out-of-sample testing, walk-forward analysis, and Monte Carlo simulation.

Related terms

Edge

A statistical advantage in a trading strategy that produces positive expected value over a large sample of trades. Without an edge, even perfect discipline cannot produce long-term profitability.

Win Rate

The percentage of trades that close profitably. A common misleading metric — high win rates with low RR can be less profitable than low win rates with high RR.

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