What is backtesting in trading?

Backtesting is replaying a trading strategy's exact rules on historical market data to see how it would have performed. The strategy's entries, exits, fees and position sizes are simulated bar by bar, producing an equity curve and statistics like total return, Sharpe ratio, maximum drawdown and win rate.

A backtest answers one question only: how did these rules behave in that past period? It is evidence, not proof — the honest follow-up is always whether the result holds on data the rules were never tuned on, which is what out-of-sample testing and walk-forward analysis are for.