Backtest
Also called: backtesting, backtested returns
A test of how a set of trading or investing rules would have performed on past prices, as if they had been followed at the time.
A backtest is a simulation, not a record of real trading. It is useful for rejecting bad ideas, but it is easy to make one look impressive by testing many variations and showing only the best, choosing a favourable period, or leaving out costs.
The most credible evidence is a strategy tested on data it was not designed on, then traded with real money and every trade recorded.
Example
"This rule returned 41% a year over five years" may describe the best of hundreds of versions tried on that same period, before costs.
Learn more in these lessons
- Misleading backtests and cherry-picked resultsDoes a good backtest prove that a trading strategy works?
- BacktestingHow do you test a trading idea on past data properly?
- Survivorship, look-ahead and other backtesting biasesWhy do backtests built on real data still give unrealistic results?
- Overfitting, sample size and out-of-sample testingHow do you tell whether a backtested strategy is real or just fitted to the past?
- The limitations of technical analysisDoes technical analysis work?
- Algorithmic tradingWhat is algorithmic trading, and can an individual buy the same edge?
Related terms
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