Backtesting

Backtesting means running a strategy or model against historical data to estimate how it would have performed. It helps you assess effectiveness, risk, and consistency before you put the decision logic into production. Always test with the data that was actually available at the time of each decision. Backfilling with today’s data distorts the results and reduces the value of the test.

Example

A financial analyst backtests a trading algorithm on historical market data. They replay each trade using the features available on that date, then review drawdowns, hit rate, and costs. If the results hold under point-in-time data, the algorithm may be ready for live testing.