How to read a trading backtest: seven checks before you trust it

A backtest runs a set of trading rules over past prices to see how they would have done. Done properly, it is the best evidence available before a system has a live record. Done carelessly, it can make almost any idea look profitable. These seven checks tell the two apart.

1. How many trades, over how long?

A handful of trades proves very little: a few lucky ones can carry the whole result. Look for hundreds of trades at least, spread over several years, so the test includes rising markets, falling ones and quiet ones.

2. Are trading costs included?

Every real trade pays the spread, and most pay some slippage between the price you wanted and the price you got. A backtest that leaves these out is reporting a result nobody could have had. Ask for figures after costs, and ask what costs were assumed.

3. What data was it run on?

An intraday system tested on daily candles cannot know which came first inside the day, the stop or the target. The finer the data, the fewer of those guesses the test has to make. For intraday trading, minute-level data is the standard to look for.

4. Is the drawdown shown?

Drawdown is the largest fall from a high point to the following low. Every system has one, and it is the figure that tells you how to size your risk. A backtest that shows the total return and no drawdown is showing half the picture.

5. Is the edge tested against chance?

Markets trend, so even random entries can make money over some periods. A careful backtest compares the system with a control, for example the same trades taken in a random direction at the same cost. What the system makes beyond the control is the part that can be called an edge.

6. Could the rules have been fitted to the past?

With enough adjustable settings, any set of rules can be tuned until it fits history perfectly, and then fail on new prices. Simple rules with few settings, tested on several markets, are much harder to fit by accident. A curve that climbs in a perfectly straight line is a reason to ask more questions, not fewer.

7. Is there a live record next to it?

A backtest is hypothetical. Live trading adds things no test fully captures: real fills, real spreads at busy moments, real delays. The strongest evidence is a backtest and a live record side by side, with each clearly labelled.

How our own backtest answers these

The results for each market, year by year and month by month, are on the signals pages. How the testing is done is described on the About page.

Red flags at a glance

• An equity curve with no trade count next to it.
• A win rate with no average win and average loss.
• No mention of spread or slippage.
• A test that covers only a few months.
• No drawdown figure anywhere.
• Backtested and live results mixed together without labels.

Two related guides: win rate vs risk-reward and what R means and how to size a position.