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

Manual backtesting involves analyzing charts and historical data and manually placing the trades according to the strategy. Automated backtesting does essentially the same, but the process is automated by computer code (using programming languages like Python or specialized backtesting software).

Many traders use Google or Excel spreadsheets to evaluate the performance of a strategy. These documents work like strategy tester reports. They may include all kinds of information, such as the trading platform, asset class, trading period, number of winning and losing trades, Sharpe ratio, maximum drawdown, net profit, and more.
In short, the Sharpe ratio is used to evaluate the potential ROI of a strategy in relation to the risks. The higher the Sharpe ratio value, the more attractive the investment or trading strategy is.

The maximum drawdown represents the moment at which your trading strategy had the worst performance relative to the last peak (i.e., the biggest percentage drop your portfolio had during the analyzed period).