Backtesting basics: replaying a rule on past prices

Applying a trading rule to past prices to see how it would have done.

Illustration on a made-up price series, not market data. Hypothetical, for education only.

What it measures

A backtest applies fixed buy and sell rules to historical data and records every trade. The figure compares a simple average-crossover strategy (blue, after a 0.1% fee per trade) with just holding the asset (grey).

How to read it

Always compare with simply holding: a strategy that earns less than buy and hold, with more effort, is not useful.
Fees and slippage matter. Every trade costs something, so many small trades eat the result.
Past results do not predict future results.

A common mistake

Tuning the parameters until the past looks perfect (overfitting). The rule then fits the noise of that period and fails on new data. Test on a period you did not tune on.

Check yourself

1. Why compare a strategy with simply holding the asset? To see whether all the extra effort beat doing nothing. Because holding always wins. Because the law requires it.

2. What is overfitting? Using too much data. Tuning a rule until it fits past noise, so it fails on new data. Trading too rarely.

3. Why do many small trades hurt a result? Fees are only paid on losing trades. They do not. Each trade costs fees and slippage, which add up.

Try it

Run any template, then change the date range and see how much the result moves.

Open the app

← Previous lesson: ADX: how strong is the trend? Next lesson: Reading your results: profit, win rate, drawdown →

Educational content. Not investment advice. Past or simulated results do not predict future results.