Algo Trading Strategy Backtesting

What is backtesting?

Backtesting applies a defined trading strategy to historical data to examine how the rules would have behaved under those historical conditions.

What can you evaluate?

• Entry and exit rules
• Technical indicator conditions
• Stop-loss and target logic
• Position sizing assumptions
• Drawdown and historical volatility
• Trade frequency and transaction assumptions

Why backtesting has limitations

A historical backtest is not a prediction. Results can be affected by data quality, survivorship bias, look-ahead bias, overfitting, slippage, transaction costs, liquidity and differences between historical simulation and live execution.

Use backtesting as one part of a broader research and validation process rather than as proof of future profitability.