Backtesting Your Strategy

Backtesting means applying your trading rules to historical data to see how they would have performed.

Manual vs Automated Backtesting

Manual: Scroll through historical charts and mark entries/exits. Takes time but builds market intuition. Automated: Software tests your rules against years of data in seconds. Faster but requires programming skills.

How to Backtest Manually

1. Choose a period (at least 6 months, preferably 2+ years)
2. Roll charts back to the start date
3. Apply your rules to every bar/candle
4. Record: entry, exit, stop, P/L, notes
5. Aim for 100-200 trades minimum

What to Track

• Total trades
• Win rate
• Average winner / average loser
• Profit factor
• Maximum consecutive losses
• Maximum drawdown
• Sharpe ratio

Common Backtesting Mistakes

Curve Fitting — Optimizing rules to fit past data perfectly. The strategy won't work in live trading. Survivorship Bias — Testing only on stocks/pairs that still exist (ignoring delisted ones). Not Accounting for Costs — Spreads, commissions, and slippage eat into profits. Small Sample Size — 20 trades isn't enough. You need statistical significance.

After Backtesting

If the results are positive, forward test on demo for 1-3 months. Only then consider going live.

A trading journal helps you compare backtest results to live performance.