What is Backtesting?

Testing a strategy against historical price data to see how it would have performed — evidence before capital.

Backtesting is the practice of applying a strategy's exact rules to historical price data and recording how it would have performed. It can be done manually — scrolling a chart candle by candle, marking every valid setup, logging entry, stop, target and outcome — or with software that replays or simulates the data. A proper backtest produces the numbers that define a system: win rate, average R-multiple, expectancy, maximum drawdown and the length of its worst losing streak.

The value is confidence with evidence behind it: a trader who has watched their system survive two hundred historical trades, including its ugly streaks, holds their rules through a live losing run far better than one trading on faith. The dangers are equally real — hindsight bias (seeing setups you would never have caught live), cherry-picking favourable periods, and curve-fitting rules until they fit the past perfectly and nothing else. Test rules exactly as written, across different market conditions, and let the losing trades into the sample.