Course Content
What Is Backtesting?
Backtesting can be an important step in optimizing how you engage with financial markets. It helps you learn whether your trading ideas and strategies make sense and if they could potentially turn a profit. But how does backtesting a simple investment strategy look like? What should you be wary of when testing trading strategies? Is backtesting similar to paper trading? We'll answer all these in this article.
What Is Backtesting?
About Lesson

So, now we have a rough idea of what backtesting may look like and had a look at a very simple investment strategy. We also know that past performance is not indicative of future results.

So, how could we optimize a systematic strategy for current market conditions? We could try it out in a live market but without risking real funds. This is also known as forward performance testing or paper trading.

Paper trading is the simulation of a strategy in a live trading environment. It’s called paper trading because while the trades are documented and logged, no real funds are used. This provides you with an additional step where you can improve the strategy and get an idea of its performance.

That’s great, but where can you actually start? The Binance Futures testnet is a perfect place for you to test out strategies in the here and now but without risking your funds. You can create an account in a matter of minutes, and test out strategies in a similar environment as if you’d be live trading in real-time markets.

Something to be wary of here is “cherry-picking.” This refers to selecting only a subset of data to confirm a biased viewpoint. The point of forward testing is to test out the strategy as if it would happen in real-time. If the system tells you to do something, do it. If you only pick trades that “look good” based on your personal bias, then the test for the systematic strategy won’t be valid.