Adrian Reid explains why backtesting matters: it weeds out strategies that lose money and shows you exactly what to expect. Testing 30 years of data reveals your win rate, average trade size, and streak lengths, so you know whether you can actually stick with the strategy when real money is on the line.
So what you're trying to do is maximize the probability that you're trading a profitable strategy. And backtesting helps you eliminate bad strategies by identifying that they lost money in the past. It also helps you eliminate fragile strategies by showing you whether or not those strategies work over a wide range of market conditions and parameter values. And it gives you the confidence that your strategy is likely to work in the future. So that's what backtesting is in trading. So the benefits of backtesting are really that, first of all, it gives you confidence. If you know that your strategy was profitable in the past, there's a chance it'll be profitable in the future. Secondly, it's prevents you from trading bad strategies. If the strategy lost money in the past, don't trade it with real money in the future. It also helps you understand the dynamics of how the strategy works. Because one of the biggest challenges traders face, pardon me, one of the biggest challenges traders face is not being comfortable with how the trading strategy works. So if you know how many losses in a row you could get, how long your winners are gonna last, how big your winners are gonna be on average, how long your losers are gonna last, how big the losers are gonna be on average, the frequency of wins and losses, all of those statistics about the performance of your trading strategy, then it's much easier psychologically to follow that strategy because you're prepared for what's to come. So backtesting not only tells you about the historical profitability of the strategy, it also tells you what to expect when following the strategy. And if you know what to expect and you have confidence that it's profitable, then your ability to stick to that trading strategy as a trader is dramatically improved. And this is one of the biggest benefits of backtesting. 'cause it shows you exactly how that strategy would've played out day by day, week by week, month by month over the past 30-odd years that you've backtested it for. And that level of insight into the trading strategy you're using will increase your ability to follow it and remain confident dramatically. So that's one of the biggest benefits of backtesting.
