Module 13: Backtesting Your Strategy

Backtesting is the process of applying your trading strategy to historical data to evaluate how it would have performed in the past. It is a critical step before risking real capital.[^37][^38]

Why Backtest?

• Validates whether your strategy has a statistical edge.[^37]
• Identifies strengths and weaknesses in your rules.
• Builds confidence in your system before going live.
• Establishes realistic expectations for win rate, drawdown, and profitability.[^39]

Manual Backtesting (Chart Replay)

This is the most accessible method for beginners:

1. Open your charting platform (TradingView recommended) and use the "Replay" feature.
2. Go to a historical date on your chosen instrument.
3. Play forward candle by candle, applying your strategy rules exactly as you would in real time.[^8]
4. Record every trade in a spreadsheet: entry price, exit price, stop-loss, take-profit, result (win/loss), risk-to-reward achieved.
5. Do NOT cherry-pick—mark every setup that meets your rules, even if it results in a loss.

What to Track During Backtesting

• Total trades: Aim for at least 50-100 trades minimum for statistical relevance.
• Win rate: Percentage of winning trades.
• Average winner vs. average loser: Your average winning trade should be significantly larger than your average losing trade.
• Maximum drawdown: The largest peak-to-trough decline.
• Profit factor: Gross profit / Gross loss. Above 1.5 is solid; above 2.0 is excellent.
• Expectancy: (Win% × Average Win) – (Loss% × Average Loss). Must be positive.[^38][^37]

Backtesting Pitfalls to Avoid

• Curve fitting: Over-optimizing your rules to perfectly fit historical data. This won't work in live trading.[^38]
• Survivorship bias: Only testing on assets that "survived" (e.g., only testing on stocks that still exist, ignoring delisted ones).[^38]
• Look-ahead bias: Using information that wouldn't have been available at the time of the trade.
• Insufficient sample size: Testing on 10-20 trades proves nothing. You need at least 50-100+.
• Single market condition: Test across trending, ranging, and volatile conditions.[^37]

Paper Trading (Forward Testing)

After successful backtesting, transition to paper trading (demo trading):

• Trade your strategy in real-time with simulated money.
• This tests your ability to execute under live market conditions (speed, emotion, decision-making).
• Paper trade for at least 1-3 months before going live.[^40][^8]
• Track results the same way as backtesting.