What a backtest can and cannot tell you

A backtest runs a set of trading rules over historical data and records what would have happened. Done well, it is one of the most useful tools a trader has. Done badly, it is one of the most misleading.

What it can tell you

• Whether the rules are precise enough to be tested at all.
• How the rules would have behaved in the conditions covered by the data.
• The shape of the results: how often trades lose, how deep losing streaks went, how long recoveries took.

What it cannot tell you

• How the rules will perform in the future. Markets change, and past results do not guarantee future results.
• Anything about conditions that are not in the data.
• Whether you, as a person, could follow the rules through a long losing run.

Hypothetical results have real limits. They are produced with the benefit of hindsight, they do not involve real money, and they cannot fully account for the effect of real execution. Treat any backtest as evidence to be questioned, never as a forecast.

Educational content only. Not financial advice. Hypothetical or simulated results have inherent limitations.