Many traders and analysts use technical indicators to create a trading strategy. Now after the development of strategy, how you can be so sure of your newly created strategy? To clear this doubt, “Backtesting” term was introduced.
Backtesting is the process of testing how good or how well a trading strategy or model would perform ex-post.
In other words, it is a general method of validating the accuracy of the trading model by testing a predictive model on the historical data. If it works then this 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 real-world markets.
Note: Backtesting is very important for creating a trading strategy.