The process of applying a trading strategy's rules to historical market data to evaluate how it would have performed under past conditions. Backtesting allows traders to assess win rates, drawdowns, and risk-adjusted returns before committing real capital. Results should be interpreted cautiously, as past performance does not guarantee future outcomes and overfitting to historical data is a common pitfall.
Example
“Before going live, the trader backtested her moving-average crossover strategy on five years of EUR/USD data and found a 58% win rate with a 1.4 profit factor.”