What is Backtest?

A backtest applies a fixed, rule-based strategy to historical data to see how it would have performed. It answers the question: "If I had followed these rules, what would have happened?"

Backtests are essential for testing ideas without risking money, but they have limits. The biggest danger is overfitting — tuning rules until they fit the past perfectly, which rarely works in the future. Realistic trading costs, data that was actually available at the time, and testing across many markets and decades reduce these risks.

All results on InvestWealth.com are hypothetical backtests that include estimated trading costs. They do not guarantee future results.

By Dr. Harry Hamann