Definition. Testing how a method would have performed on historical data before applying it in the live market.
How it works
The method's rules are applied to past data and the results recorded: win rate, expectancy, drawdowns. It can be done automatically or manually, on session replays.
Example
A trader checks on 100 historical sessions how the market behaved at a particular type of level and records the results according to set criteria.
What to watch out for
The biggest risk is overfitting: rules so finely tuned to the past that they don't work in the future. A backtest result doesn't guarantee future results.
You'll find the full explanation with graphics, examples and exercises in the 📖 Order flow encyclopedia space, and its use in the live market in the 🔴 Live Room. Both are available to Club members (in Polish).
