What is backtesting

Backtecting is simulating how a strategy would have performed, had we been following it historically

For example, if our strategy were: buy all profitable stocks in equal amounts, and rebalance quarterly ….

  1. Backtesting over 10 years would start in Oct 19th 2005,
  2. divide our money equally between all stocks that were profitable then,
  3. hold them until Jan 19th 2006,
  4. sell them at prices from Jan 19th 2006,
  5. reinvest the proceeds into stocks profitable in Jan 2006
  6. rinse and repeat until today … 40 quarters later

The report for the backtest would present how this strategy would have performed historically, and we could compare this to the index returns or other returns.

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