What is Backtesting?

Backtesting is the process of testing a trading strategy against historical market data to see how it would have performed. Instead of risking real money, you simulate your strategy on past price data to evaluate its potential.

The core idea is simple: if a strategy worked consistently in the past across different market conditions, it has a better chance of working in the future. However, past performance never guarantees future results.

A proper backtest includes realistic assumptions about trading costs, slippage, and position sizing. Without these, results can be misleadingly optimistic — a trap known as "overfitting."

Key metrics to evaluate include total return, maximum drawdown, Sharpe ratio, win rate, and profit factor. These tell you not just how much money the strategy made, but how much risk it took to get there.

Backtesting is an essential tool for any serious trader or investor. It removes emotion from the equation and lets the data speak for itself.