Backtesting means using previously available or historical data for arriving at the current result and confirming if it has worked. This confirmation, if achieved, can be used as a strategy to achieve similar results in future. In case it does not meet the used or set criteria, it is tested again by using new techniques or after modifying the applied parameters.
Important features of Backtesting strategy are:
a) Backtesting makes use of historical data for testing the robustness, accuracy and effectiveness of a trading strategy
b) It is a ‘test’ and once the testing yields desired results, is applied on actual markets
c) It takes into consideration the risk, gains, historical performance, assets as parameters for testing
d) The time frame, data points and other criteria should be realistic, or the results can be inaccurate or misleading
e) There are softwares and tools available for performing backtesting experiments online
Backtesting has the following advantages:
a) It is a mathematical tool and provides a base for trading strategy
b) Quantifiable risk and return pattern brings efficiency to the trades
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