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Testing a trading rule on past market data to see how it would have behaved — before risking any real money.
Why It Matters
Backtesting replays a strategy against historical prices to estimate how it might have performed. It's a reality check, not a crystal ball: markets change, and a rule that looked brilliant on the last ten years can still fail tomorrow. Backtests are also easy to fool yourself with — through look-ahead bias (using data the strategy couldn't have known yet), survivorship bias (testing only on companies that survived), and overfitting. A backtest describes the past; it does not predict the future.
Key Points
- Replays a strategy on historical data to estimate past behavior
- Common traps: look-ahead bias, survivorship bias, and overfitting to old data
- Strong past results never guarantee future results
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Backtesting: Testing a Strategy on History
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Related Terms
Common Questions
Testing a trading rule on past market data to see how it would have behaved — before risking any real money. Backtesting replays a strategy against historical prices to estimate how it might have performed. It's a reality check, not a crystal ball: markets change, and a rule that looked brilliant on the last ten years can still fail tomorrow.
Backtesting replays a strategy against historical prices to estimate how it might have performed. It's a reality check, not a crystal ball: markets change, and a rule that looked brilliant on the last ten years can still fail tomorrow. Backtests are also easy to fool yourself with — through look-ahead bias (using data the strategy couldn't have known yet), survivorship bias (testing only on companies that survived), and overfitting. A backtest describes the past; it does not predict the future.
Replays a strategy on historical data to estimate past behavior
Common traps: look-ahead bias, survivorship bias, and overfitting to old data
Strong past results never guarantee future results