Search Dictionary

Definition of 'Backtesting'

Backtesting is a trading technique used to evaluate the performance of a trading strategy by testing it on historical data. It is a critical step in developing a trading strategy, as it can help to identify potential risks and pitfalls.

There are a number of different backtesting methods available, each with its own advantages and disadvantages. The most common method is to use a historical price series to simulate trades. This can be done manually or using a backtesting software program.

When backtesting a trading strategy, it is important to use a realistic set of parameters. This includes the following:

* The time period used for backtesting
* The frequency of data updates
* The trading costs
* The slippage

It is also important to backtest the strategy on a variety of different market conditions. This will help to ensure that the strategy is robust and not subject to overfitting.

Backtesting can be a valuable tool for developing and testing trading strategies. However, it is important to remember that backtesting is not a guarantee of future performance. It is always possible that a strategy that performed well in the past will not perform well in the future.

Here are some additional tips for backtesting:

* Use a variety of backtesting methods.
* Backtest the strategy on different time frames.
* Backtest the strategy on different markets.
* Backtest the strategy on different asset classes.
* Backtest the strategy with different sets of parameters.
* Backtest the strategy over a long period of time.

By following these tips, you can increase the accuracy of your backtesting results and improve your chances of developing a successful trading strategy.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.