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 ….
- Backtesting over 10 years would start in Oct 19th 2005,
- divide our money equally between all stocks that were profitable then,
- hold them until Jan 19th 2006,
- sell them at prices from Jan 19th 2006,
- reinvest the proceeds into stocks profitable in Jan 2006
- 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.