What does backtesting trading strategies mean? Let's have a look at the traders' toolbox. What do you think we are going to find? The trading platform itself along with custom and integrated indicators, information sources with trading basics. What else? A notebook with all trades written there. News and analytics, different types of chart patterns.
Sounds like enough for successful trading. But something is missing. The toolbox should also include the trading strategy that has been worked out to meet your specific needs and trading style. What's more, we need to be 100% sure that strategy is working. This is where backtesting trading strategies will help.
What is strategy backtesting?
The idea is pretty clear. We have a trading strategy and we want to check if it works under real market conditions. To make it simpler, backtesting trading strategies is the procedure that helps to extrapolate the given strategy or hypothesis in the previous time frame. In other words, we do not apply the strategy to the upcoming period and use historic timeframes and data instead. With backtesting trading strategies, we actually go back in time and try to see how the present hypothesis would work.
The main benefit here is that a trader can choose any period with the same features and factors if compared to the represent one and adjust the current trading strategy to the historical timeframe with the same outcome. Sounds very effective but complex. Not until you figure out how to backtest trading strategies yourself.