Glossary
Backtesting
The process of testing a trading strategy on historical data to evaluate its performance.
Backtesting simulates how a strategy would have performed in the past using historical price data. A well-designed backtest accounts for transaction costs, slippage, survivorship bias, and lookahead bias. It is a critical step before deploying real capital.
Key Points
- Always include realistic transaction costs and slippage.
- Avoid survivorship bias by including delisted assets when relevant.
- Validate results with out-of-sample and walk-forward testing.