How to backtest a trading strategy

Step 1: write the rules before you look at a chart

Entry trigger, stop placement, target or exit rule, position size, and the sessions or instruments you will trade. If a rule cannot be written down, it cannot be backtested.

Step 2: replay, do not scroll

Move forward one bar at a time so you cannot see what happens next. Any backtest done by scrolling a finished chart quietly bakes hindsight into every entry.

Step 3: log every trade the rules produce

Including the ones you would rather skip. Record date, symbol, entry, stop, target, exit and result. Skipping losers is the fastest way to produce a fake edge.

Step 4: measure over a real sample

At least 100 trades of the same setup. Compute win rate, average win, average loss, profit factor, expectancy and maximum drawdown. Anything under 30 trades is noise.

Step 5: forward test before you size up

Trade the rules live at minimum size for a month. If live results are far from the backtest, the difference is usually execution, slippage or discipline rather than the strategy.

Common mistakes

Curve-fitting to one market period, ignoring commissions and slippage, changing the rules mid-test, and testing on a period that only contains one kind of market condition.

Frequently asked

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