Why hypothetical results overstate reality

Much of what is sold to you is not real trading at all. It is hypothetical or simulated performance — a backtest of what a strategy would have done. There is a reason regulators insist this carries a prominent warning, and it is worth stating in plain words.

The standard caution, in plain language

Hypothetical and simulated results have inherent limitations. Unlike a real track record, they do not represent actual trading — no real money was at risk. Because the trades were selected with the benefit of hindsight, simulated programs in general are designed with knowledge of what already happened. Simulated trading also cannot fully account for the impact of financial risk on real decisions: it is one thing to weather a drawdown on a spreadsheet, another to hold through it with your own savings on the line. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance — real or hypothetical — is not indicative of future results.

Why the gap is real, not pedantic

• No slippage or partial fills in most backtests; live markets impose both.
• Costs understated — spreads, commissions and overnight charges are often left out or assumed too low.
• Hindsight curve-fitting — a strategy can be quietly tuned until it fits the past perfectly and then fails the moment the future differs.
• Selection of the best window — the start and end dates are frequently chosen to look their best.

The takeaway

A backtest is a hypothesis, not a promise. Treat any record that is hypothetical, simulated, or unverified as marketing until proven otherwise — and remember the warning applies to real results too. Yesterday’s winners are not tomorrow’s.