What is backtesting in trading
In short: Backtesting checks trading rules on historical data: how a strategy would have performed in the past. It helps discard obviously losing ideas but does not guarantee the future — it is easy to tune rules on history until the results look perfect.
How to do it honestly
Write the rules before testing, do not change them along the way, test on several periods and markets and include spreads and fees. Look not only at profit but at maximum drawdown and the length of losing streaks.
How it differs from live practice
On history you see the future and feel no fear. So after a backtest you need trading on live prices — even if only on a virtual account.
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Trading on financial markets carries a risk of losing money. This material is educational and is not investment advice.
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