Backtesting is the general method for seeing how well a strategy or model would have done ex-post. Backtesting assesses the viability of a trading strategy by discovering how it would play out using historical data. If backtesting works, traders and analysts may have the confidence to employ it going forward.There are many different ways to backtest a model or strategy; some are more sophisticated than others. In its most basic form, backtesting simply involves applying the proposed rules or criteria for buying and selling assets against past market data in order to generate hypothetical results. These results can then be used to estimate such things as risk, reward potentials, and probabilities of success over different time horizons.While there is no guarantee that future performance will mirror past performance, successful backtests can provide important insights into how well a given approach might work in practice knowledge that can help traders make informed investment decisions.
