Backtesting is a strategy that uses historical data to evaluate the trader’s trading strategy whereas scenario analysis employs hypothetical data stimulating all various possible outcomes. For example, scenario analysis considers all changes that can affect the portfolio’s securities such as a change in the rate of interest, etc.
In other words scenario analysis is used to evaluate the change in the portfolio’s value with respect to the unfavorable event and might also be used to analyze hypothetical worst-case scenarios.
There are other trading strategies that are employed by traders. Ideal Backtesting Scenario, Forward Performance Testing & Scenario Analysis, etc.
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