Searching for the meaning of the term “Backtesting” or “Backtesting in trading strategies”? A backtesting trading strategy is a method developed from combinations of a set of rules. Rules are consisting of one or more technical indicators due to their extensive usefulness in trading.
Both traders and analysts use technical indicators to create a trading strategy. They work continuously to make a good, reliable, and error-proof, automatic, viable strategy.
Once they successfully develop a trading strategy the next question awaits i.e, how to be so sure of the newly created strategy? To answer this question, the “Backtesting” term was introduced.
What is a Backtesting Process in Trading?
Backtesting is the process of testing how good or how well a trading strategy or model would have performed ex-post.
In other words, it is a general method of validating the accuracy of the trading model by testing a predictive model based on the historical data. If it works then it also gives traders confidence to interpret it further.
What is the Importance of Backtesting?
It is one of the very important aspects of developing a good and successful trading strategy. If created successfully and applied correctly, then it can be very helpful to traders in optimizing and improving their trading strategies.
It can also help in identifying any theoretical and technicals flaws in their trading strategy and optimize it accordingly before implementing it to the real-world markets.
The most important benefit of backtesting is that it allows traders to simulate a trading strategy using historical data to generate the outcome of employing a trading strategy along with the risk associated with it. All can be done without actually risking any actual capital.
Note: Backtesting is a very important aspect of creating a good trading strategy without actually putting any real capital at risk.