How to Backtest Your Trading Strategy Effectively

What is Backtesting?

Backtesting is the process of testing a trading strategy on prior time periods. Instead of applying a strategy to the present and seeing how it does in the future, you test it on past data to see how it would have performed.

Common Backtesting Mistakes

Avoid overfitting, survivorship bias, look-ahead bias, and ignoring transaction costs. These common mistakes can lead to overly optimistic backtest results that won't translate to real-world performance.