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What a proper backtest is, which numbers to look at, and the trap of overfitting
Published by The Retail Trader · AUG 09, 2026 · Features
Every trader has a method. Very few have an answer to how that method did over the last 200 trades. A backtest is an attempt to give that answer — and its biggest benefit is not money, it is confidence.
Applying your rules to past data exactly as you would apply them going forward. There are two conditions: the rules must be written down beforehand, and they must not be changed midway.
If you keep making rules while looking at the chart, it is not a backtest. It is a story you are writing backwards.
Win rate alone is the most useless number. Look at these:
• Expectancy — how much each trade makes or loses on average. This one number describes the whole system.
• Maximum drawdown — how bad the worst patch was. It tells you how much nerve it takes to endure the system.
• The longest losing streak — because in real life that is exactly where you abandon the system.
• Number of trades — a backtest of 20 trades is just an anecdote. You need enough observations for a conclusion.
You keep turning the parameters, and the curve keeps getting prettier. A stop looks better at 2%, then better still at 1.8%. You get happy.
You haven't built a system — you've memorised past data. Such a system almost always does badly going forward. The clearest test is this: nudge the parameters a little either way. If the results collapse, the system is brittle.
A backtest has no slippage, charges are often left out, and the biggest thing — it has no nerves. On paper a streak of 12 losses is one row; in real money it is three months.
That is why a forward test comes after the backtest: on small size, in the live market, with the same rules. This is where you find out whether the system works or lives only in a spreadsheet.
The aim of a backtest is not to prove that your method works. Its aim is to find out when it doesn't work. A trader who knows his system's worst condition in advance sticks with the system even in that condition — and that is the real benefit.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advice. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.