Backtesting Framework
Simulating the past to predict the future.
Backtesting is the process of testing a trading strategy on relevant historical data to ensure its viability before risking actual capital. A robust framework accounts for transaction costs, slippage, and market impact.
Common Pitfalls
Bias Types
- Look-Ahead Bias: Using information in the test that wasn't available at the time.
- Survivorship Bias: Testing only on stocks that exist today (ignoring bankruptcies).
- Overfitting: Tuning parameters to perfectly match past noise.
Key Takeaways
Past performance != Future results.
Out-of-sample testing is required for validation.
Clean data is critical.
Backtesting Framework
Simulating the past to predict the future.
Backtesting is the process of testing a trading strategy on relevant historical data to ensure its viability before risking actual capital. A robust framework accounts for transaction costs, slippage, and market impact.
Common Pitfalls
Bias Types
- Look-Ahead Bias: Using information in the test that wasn't available at the time.
- Survivorship Bias: Testing only on stocks that exist today (ignoring bankruptcies).
- Overfitting: Tuning parameters to perfectly match past noise.
Key Takeaways
Past performance != Future results.
Out-of-sample testing is required for validation.
Clean data is critical.
Apply This Knowledge
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