Angie · learn
Backtest
Running a set of rules over history to see what they would have done. It shows what did happen, never what will, and it flatters any rule tuned on the same data.
Updated 2026-09-03
A backtest runs a set of trading rules over historical data and reports what would have happened. It is the only way to test a strategy without spending money, and it is the single easiest thing in finance to fool yourself with.
What a backtest cannot tell you
- Whether the rules were chosen because they work or because they fit this particular history. See curve fitting.
- Whether you would actually have taken the trades. A drawdown looks survivable on a chart and does not feel survivable in the eighth month.
- Whether the market still behaves the way it did in the sample.
- Whether the fills were realistic. Backtests routinely assume you bought at a price nobody was offering.
A backtest is best understood as a filter that removes bad ideas rather than as evidence that finds good ones. A strategy that fails a backtest is almost certainly not worth trading. A strategy that passes one has cleared the lowest bar there is.
See also
- Out of sample — Testing on data the search never saw. Angie hides the last quarter of history, then re-runs the winners on it, and flags any whose result collapses.
- Curve fitting — Tuning a strategy until it memorises one stretch of history. It produces beautiful backtests and no future returns, which is why results are held out and re-tested.
- Buy and hold — Buying once and doing nothing. The benchmark every strategy must beat, measured over the identical window, because beating nothing is not a result.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
