Definition

Backtesting is the process of evaluating a trading strategy using historical market data to assess how it might have performed in past conditions. It helps traders analyze potential behavior before deploying capital in live markets.

Backtesting results are hypothetical and based on historical inputs.

Example in Context

Before launching a strategy, a trader tests it against five years of historical Bitcoin data to evaluate drawdowns, win rates, and trade frequency.

FAQs

Does strong backtest performance guarantee future results?

No. Past performance does not guarantee future outcomes.

What are common backtesting limitations?

Over-fitting, incomplete data, and unrealistic assumptions about fees or liquidity.

Is backtesting required before live trading?

Not required, but widely considered a best practice.

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