Backtesting is the process of evaluating a trading method using historical data. By looking for statistical significance of how the method performed in the past, one can make an attempt to predict how a trading method might perform in the future.
Example Equity Curve during backtesting
Some popular trading platforms that include the ability to backtest trading methods include:
NinjaTrader,
TradeStation, and
MultiCharts.
While backtesting can reveal a strength or weakness in a method, the results are not always correlated to future outcomes. You can use a large
sample size such as 5 years of market data, or more, and still fall victim to over fitting or
curve fitting your method to fit the historical data, instead of merely
data mining to a positive outcome.
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