Definition and example
A backtest calculates what would have happened when defined rules were applied to a historical dataset. It depends on data, period selection, available information, costs and the execution model.
Synthetic example: studying a rule over ten fictional sessions teaches test organisation; it is not evidence about a real market. Changing parameters until the most attractive result appears can fit the rule to sample noise. Keep variants and limitations. Retrospective evaluation neither guarantees future profitability nor removes differences between simulation and real execution.
Sources and references
- Bailey et al. · The probability of backtest overfitting
- CFTC · Limits of hypothetical trading results
Chezur examples and explanations are educational. Consult the original source to verify conditions, data and updates.
Context and review of this explanation
What is a backtest and which assumptions does it need?
- Topics
- Method and statistics
- Level
- Beginner
- Skills
- Design a reproducible evaluation
- Examples
- Hypothetical situations illustrating the concept.
- Specialist review
- Not documented for this edition. Automated structure and internal-link checks do not establish specialist review.