Adrian Reid explains backtesting: running a trading strategy against historical market data to see if it would have made money. A strategy that lost money over decades won't suddenly work now, but one that profited over time has better odds of future success. Backtesting can't guarantee profits but tilts the odds in your favor.
So first of all, what is backtesting? Well, simply backtesting is when you take your trading rules, the rules for your trading strategy, and you apply them typically using a backtesting software to past data. And what you're trying to do is generate all of the signals that your trading strategy would have generated in the past and evaluate how profitable those signals were in the past. Now, the reason you wanna do this is to determine whether or not that strategy is actually good enough to trade real time going forward into the future. Future. Let me ask you this, because one of the most common questions or challenges I get about backtesting is, yeah, Adrian Reid Reid Reid, but that's great. That's on past data and the future is not the same as the past. So backtesting is irrelevant, right? Because it's in the past and it doesn't, it doesn't apply to future trading conditions. And my response is that's absolute crap. Because let me ask you this, Would you rather trade a strategy that showed you a profit over 30 years of backtesting, or would you rather trade a strategy which showed massive losses over 30 years of backtesting? I mean, the choice is obvious, right? There's no reason to expect that a strategy that lost money in the past would miraculously turn around and start being profitable just because you started to trade it. So if you think that backtesting isn't relevant because it's on past data, That's absolutely a mistake because the big question is, you're trying to answer is, will my strategy be profitable? Now, backtesting can't tell you definitively, will it be profitable? But what it can do is help you put the odds or tilt the odds in your favor. If the strategy was unprofitable in the past, it's not gonna be profitable in the future if you backtest over a long enough time period. So if you backtest your strategy and it didn't make money in the past, don't trade that strategy in real time in the future because you're unlikely to make money. Now, if you backtest your strategy and it did make money in the past, there's a chance that it could continue to make money in the future. Now, how do you improve that chance? By backtesting correctly, by doing deep analysis that I'll talk about in the rest of this video series and on the blog post below if you're on my website. Backtesting correctly really tilts the odds in your favor. [MUSIC] [MUSIC]
