Backtesting

The process of testing a trading strategy using historical data to evaluate its performance before implementing it with real money. Backtesting reveals returns, volatility, drawdowns, and other metrics over past periods. However, backtesting has limitations: it assumes future conditions match the past, it is subject to overfitting (optimizing too heavily to historical data), and it does not account for slippage and execution costs. Strong backtesting results do not guarantee future performance.