Backtesting for Beginners: What It Can and Cannot Tell You

Use historical data carefully when evaluating a market idea.

Backtesting means applying a defined set of rules to historical data to study how the rules would have behaved in the past.

A useful backtest requires clear rules, realistic assumptions and attention to costs, slippage, liquidity and data quality. Overfitting is a major risk: a strategy can look excellent on historical data because it was tuned too closely to the past.

Backtesting is educational evidence, not a guarantee of future performance. Forward testing and ongoing review are separate steps.