Definition of Backtesting

Backtesting is a technique to test the trading strategy on historical data which is relevant in order to ensure its viability. It is also known as “interpreting the past.”

If the results of backtesting meet the required standards, then the trading strategy can be used by the trader with actual capital to gain profit. But, if it does not meet the necessary standards, then it needs to be modified and tested again.

Points to remember:

• A backtesting procedure should reflect reality to the largest extent.
• An important parameter tested using this technique is the robustness of the trading strategy.