What a backtest is — and is not

A backtest simulates how a trading strategy would have performed on historical data. You define entry and exit rules, replay the past candle by candle, and measure the resulting equity curve.

What it gives you

• A way to check whether an idea has any historical edge at all.
• Statistics to compare strategies: total return, drawdown, Sharpe ratio, win rate, number of trades.
• A sense of how the strategy behaves in different market regimes.

What it is NOT

A backtest is not a prediction of the future. It is a hypothesis test on the past. Markets change; an edge that existed for ten years can vanish the moment enough people exploit it.

Every backtest result you will ever see — including the ones in this track — is hypothetical performance. Hypothetical results have well-documented limitations: they are computed with hindsight, they do not involve real money or real emotions, and they often quietly assume fills you would not actually have gotten.

The honest mindset

Treat a backtest as a tool for rejecting bad ideas, not for proving good ones. A strategy that fails a backtest is almost certainly bad. A strategy that passes one might be good — or might be overfit. The next lessons are about telling the difference.