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Back Testing

Discussion in 'Traders Glossary' started by Pharaoh, Apr 15, 2010.

  1. Pharaoh

    Pharaoh Colonel

    Oct 3, 2007
    Likes Received:
    A method for checking the potential profitability of a trading system by applying it to historical data.

    There are three major issues with backtesting.

    The first is that the quality of back testing data varies. Historical data often does not include every tic of actual price action. Sometimes this can change when or if trades open or close.

    The second issue is that an EA or other trading system may be "over-optimized" to give incredibly good results in backtesting. It can be so optimized that results are near-perfect or even completely perfect, but only for the exact historical data set used to create it. Over-optimized systems often fail quickly when used in the real world.

    The third issue is that the market changes all the time. A system can work well for months or years, even in forward testing, but can still fail later when faced with sufficiently different market conditions.





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