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

In finance, backtesting looks at the viability of a trading strategy by testing how it would have done based on historical data. In other words, it uses past data to see how a strategy would have performed. If backtesting shows good results, traders or investors may go ahead and apply the strategy to a live environment.

But what do good results mean in this case? Well, the purpose of a backtesting tool is to analyze the risks and potential profitability of a particular strategy. The investment strategy can be optimized and enhanced based on statistical feedback to maximize the potential results. A well-conducted backtest can also provide assurance that the strategy is at least viable when implemented in a real trading environment. 

Naturally, a backtesting platform or tool can also be beneficial in showing when a strategy is not viable or too risky. If the backtesting results indicate a suboptimal performance, the trading idea should be either discarded or modified. However, it’s also important to consider the market conditions it was tested in. The same backtesting could present conflicting results when the market conditions change.

On a more professional level, backtesting trading strategies is absolutely essential, especially when it comes to algorithmic trading strategies (i.e., automated trading).