JoymistaWhat Is Backtesting a Trading Strategy?
Backtesting is running a trading strategy’s rules on past price data to see how it would have done: win rate, return and largest drawdown.
Explained
Backtesting weeds out weak ideas before real money is at risk, but past results do not guarantee the future. Its biggest trap is overfitting: tuning the rules until they fit the past perfectly, so they fail on new data.
Example
Example with made-up numbersA strategy gives 100 trades, 45 winners averaging 2R and 55 losers averaging 1R, a result of 45 × 2 − 55 × 1 = +35R before costs.
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Related terms
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- Trading JournalA trading journal is a record of every trade: the instrument, direction, reason for…
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Open in JoymistaEducational content, not investment advice.