Adrian Reid explains that thorough backtesting does more than show profitability: it quantifies what to expect from a trading strategy (drawdowns, losing/winning streaks, time between equity highs, intraday losses), which builds emotional confidence and prevents hesitation or premature exits. Knowing these bounds lets traders distinguish normal periods from genuine problems and continue following rules during difficult stretches.
Chapters
Alrighty. Key benefits I think we've covered determining that you've got an edge, determine that your rules are robust, monitor the stability of your edge, build confidence in your strategy and prepare yourself to know what would happen in real life. So back testing is not just about developing a system that's profitable, it's also about building confidence in that system and understanding what potentially could happen in your account. So if you haven't run a back test, how deep could your drawdown be? You don't know. How many losses in a row could you get? You don't know. How long between equity highs? You don't know. How much could you lose in any one day trading? You don't know. But if you've back tested over 30 years of market history.
And you've really interrogated those results, you can answer all of those questions. And so you can build comfort, say, oh, okay, I'm down three days in a row. Don't worry, totally normal. I've had five losses in a row, also normal. I'm in a 20% drawdown, also normal. It's been a month since I've had an equity high. Also normal. Right. All of the answers to these questions will depend on the strategy of trading. But if you can't answer them, all of those situations start making us a little bit nervous. Right. Have you ever been nervous when you've been taking a trade? Oh, you know this, should this be happening? Is it broken? Is my edge gone? Should I be in the markets or should I exit? All of those things are driven by nerves, fear, typically. And if you've done the back test properly, then you can answer those questions about is this normal? And if you know it's normal, then you can just keep following the system. If you know it's not normal, then something might be broken. You can do a deep dive investigation, figure out what's going wrong.
And so that's also the benefit of back testing, is really building that emotional confidence to keep following the system.
How many you've ever had some trading rules but maybe hesitated to take a trade or maybe exited too early or maybe not exited when you should have? Yeah, like most of us. And that comes from lack of confidence. But once you've back tested thoroughly and you've got that confidence, it's much easier to just keep trading through the hard times because you know it's normal. Like you running the backtest, you can identify the bounds of what is likely to happen with that system. How many days down in a row, how many kind of winning days in a row, what percentage of winners, what percentage of losers, depth of drawdown, all of those things you can answer. And when you know what to expect, it doesn't shock us when it happens.
And that's part of the battle, right? We've got to stay in the game mentally, be prepared for what could happen.
