What is backtesting in trading?

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.

What is a backtest and how does it work?

A backtest is usually coded by a programmer running a simulation on the trading strategy. The simulation is run using historical data from stocks, bonds, and other financial instruments. The person facilitating the backtest will assess the returns on the model across several different datasets.

What are the different types of backtesting measures?

Common backtesting measures include net profit/loss, return, risk-adjusted return, market exposure, and volatility. Analysts use backtesting as a way to test and compare various trading techniques without risking money. The theory is that if their strategy performed poorly in the past, it is unlikely to perform well in the future (and vice versa).

What is backtesting in predictive modeling?

Backtesting is a term used in modeling to refer to testing a predictive model on historical data. Backtesting is a type of retrodiction, and a special type of cross-validation applied to previous time period (s).