Adrian Reid explains why backtesting matters: a strategy profitable in historical data has a chance to work going forward, while one that lost money historically has essentially zero chance. A strategy that survives bull and bear markets, grinds upward slowly, and shows a stable edge is more likely to remain profitable.
The reason backtesting is important is this: if we don't backtest, we have no clue whether our strategy is going to be profitable, whether or not we've got an edge. If we backtest it and it is profitable in the backtest, there's a chance it might make money in the future. However, if we backtest it and it doesn't make money in the past, there is zero chance that it's going to make money in the future long term. So at least if we backtest our strategy correctly, we can eliminate the strategies that just don't work. Yeah, because if it made money in the past, it might make money in the future. If it didn't make money in the past, it's not going to miraculously turn around and start being profitable because you started trading it today, right? It's just not. I've tried. It doesn't work. So we need to first establish, was it profitable in the past? The next leap after that is, is it really likely to continue being profitable in the future? And this is much more nuanced, and we'll get into some of the detail about how we tell that. But if your strategy survives through bull markets and bear markets and it keeps grinding up slowly, yeah, it's going to have drawdowns and everything, but if it keeps going up over time and it's— the edge is stable, like it's not decaying and starting to lose money, then there's a good chance it's likely to be profitable in the future. That's really the driver of it. We want to eliminate strategies that just don't work, and you'd be surprised how many strategies from books like this just don't work. Yeah, they might have worked in the past, or maybe they never really worked. But if you find a strategy from a book, from a website, from a course, if you don't test it, you're really flying blind. And I think that's just criminal because it's your money and no one cares about your money more than you. You've got to take responsibility and check whether or not those strategies work. So that's why I would say backtesting is just so critical.
