Why Backtesting Matters: Validating Trading Strategies

Before risking real money on a trading strategy, you need to know if it actually works. Backtesting uses historical data to validate strategies and calculate realistic win rates.

What is Backtesting?

Backtesting applies your trading rules to historical price data to see how the strategy would have performed in the past. If your strategy is "buy breakouts above 20-day highs with 2x volume," backtesting shows:

• How many trades it would have generated
• What percentage were winners vs losers
• Average gain per trade
• Maximum drawdown
• Risk/reward ratio

Key Metrics to Track

Win Rate

Percentage of trades that hit target before stop. A 60% win rate means 6 out of 10 trades are profitable. However, win rate alone doesn't tell the full story - you need to know the size of wins vs losses.

Expectancy

Average profit per trade after accounting for wins and losses. Formula: (Win Rate × Avg Win) - (Loss Rate × Avg Loss). An expectancy of 0.5 means you make $0.50 for every $1 risked on average.

Number of Trades

Sample size matters. A strategy with 10 trades might be luck. A strategy with 100+ trades showing 60% win rate is statistically significant.

Why Our Scanner Shows Backtests

Every signal in our scanner includes 4-year backtest results. When you see "62% win rate, 45 trades," you know:

• This pattern has worked 62% of the time historically
• It has generated 45 similar setups in 4 years (good sample size)
• You're not trading blind - you have statistical validation

Avoiding Common Pitfalls

Overfitting / Curve-Fitting

Creating a strategy that works perfectly on past data but fails on new data. Solution: Use long time periods (4+ years) and require minimum trade counts (30+).

Ignoring Transaction Costs

Slippage and commissions eat into profits. Our backtests assume realistic fills and $0 commissions (standard with modern brokers).

Cherry-Picking Data

Testing only during bull markets inflates results. We test across full market cycles including 2022 bear market.

The Bottom Line

Would you rather trade a setup that "looks good" or one that has proven to work 60%+ of the time over 4 years with 50+ historical examples? Backtesting turns guesswork into data-driven decisions.