Backtesting in trading
Published on: 08/03/2022 | Modified on: 19/09/2023
Backtesting is a manual or systematic method of determining whether a trading strategy or concept has been profitable in the past. A trader can manually backtest a strategy or use backtesting software to help determine if a trading strategy is likely a waste of time and money, or if it shows promise and profitability in a variety of markets.
Since backtesting does not always require software and can be carried out by any type of trader, manual backtesting will be the focus of this article. This means that there is less risk without automated software as it can be tested using a free demo trading account, such as the one offered on our online trading platform. As always, there are no guarantees and as such, you should still consider risk management tools.
- Backtesting uses historical data to assess which strategies worked and which didn’t
- It is the opposite of paper trading or forward testing, which requires you to make real-time actions
- Depending on if you’re using a short or long-term strategy, you could require data anywhere from several weeks to several years
- Technical indicators such as RSI can help to support theories with accurate readings
- The calculation for percentage return should indicate how successful the strategy was