Last Updated on 15 January, 2025 by Abrahamtolle
We believe backtesting is crucial to have consistent success in trading. It makes you disciplined because it forces you to write down specific trading rules. This way, you can see if your strategy has a positive expectancy. We suspect most traders don’t have a positive expectancy because they use anecdotal evidence and focus more on the winners than the losers.
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We have conducted plenty of reader polls, and you find them all in our article about crypto trading statistics, truths, realities, and facts.
What is the biggest challenge traders face when backtesting trading strategies?
To find out, we conducted a survey on Twitter where we asked what our readers believe is their biggest challenge when backtesting trading strategies. This was the result of our poll/survey:
Perhaps a little surprising, the biggest obstacle is to apply the backtest (or convert) the backtest results to live trading. We assume that this is more a technical issue than a failure to perform live as indicated in the backtest.
Let’s remind you about the challenges of backtesting:
- Data quality and availability: The quality and availability of historical data are essential for backtesting. Garbage in equals garbage out. Poor data quality can lead to false signals and VERY misleading results.
- Overfitting or curve-fitting: Overfitting is a common problem in backtesting, where the strategy is optimized too closely to the historical data. This can lead to the strategy performing well in backtesting but underperforming in live trading.
- Survivorship bias: Survivorship bias is the tendency only to consider the winners and ignore the losers. This can lead to an overestimation of the strategy’s performance.
- Look-ahead bias: Look-ahead bias is when the trader uses information that was not available at the time of the trade to make decisions about the strategy. This can lead to an inflated performance in backtesting.
- Backtesting is not a perfect predictor of future performance: No matter how carefully backtested, a trading strategy may not perform well in live trading. This is because market conditions are constantly changing, and many factors cannot be perfectly controlled for in backtesting.
- Backtesting is a time-consuming process: Backtesting a trading strategy can be time-consuming, especially if the trader is testing multiple strategies or using complex trading algorithms. However, if you don’t want to backtest, we recommend buying some ETFs or mutual funds and ignoring trading.
We remind you that we have a long backtesting guide that might be useful for you.