Adrian Reid argues that backtesting is critical: without it you cannot know whether a trading strategy has an edge or will be profitable. A strategy that failed historically has essentially no chance of long-term future profitability, while historically profitable strategies may but do not necessarily remain profitable — survivability across market regimes (bull and bear markets) and stable edges are key. He warns against blindly using strategies from books, websites, or courses without testing and frames backtesting as a personal responsibility to protect one’s money.
Chapters
So why is backtesting important? The reason backtesting is important is this. If we don't back test, we have no clue whether or not our strategy is going to be profitable, whether or not we've got an edge. If we back test it and it is profitable in the backtest, there's a chance it might make money in the future. However, if we back test 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 back test 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.
