Backtesting

    By
    sebkuhnert
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    Backtesting involves simulating the performance of a trading strategy based on historical data. This provides an opportunity to estimate how effective a strategy would have been if it had been used.

    Backtesting can be done by a real person going over data for past time periods or it can be done algorithmically, which reduces the risk of human error.

    Be careful when considering backtesting results

    Past performance is not indicative of future results and you should, therefore, be careful when considering backtesting results.

    Backtesting is not an exact science and there are many variables that can affect your performance.

    Some of the things to be aware of include:

    • The market environment can change, so even if you apply your strategy using exactly the same rules, the outcome can vary depending on market conditions.
    • Different brokers will have different spreads which can produce variations in your results.
    • When trading in a live environment, there is a greater chance that you will make an error or react too slowly to changing market conditions.
    • Trading large amounts means that there is a possibility of moving the price of an asset simply by placing a trade.

    Always practice with a demo account first

    Experienced traders will be better placed to recognise certain market conditions and decide when or when not to trade a strategy.

    It takes time to acquire this skill and you should always practice with a demo account before trying out any strategy with real money.

    To find out more about backtesting, go to the following lesson:

    Testing a trading strategy with backtesting software

    To see backtesting results for our forex beginner strategy, read our lesson:

    Backtesting the forex beginner strategy