Backtesting

Hindsight is 20/20. Or so many veteran traders will tell you. Backtesting applies a trading strategy based on past market conditions over a period of time. The assumption is that, if the strategy worked then, it should work now.

However, as we are always told on every prospectus, "Past performance is not indicative of future results." Same deal with backtesting. Sometimes strategies that performed well in the past don't pan out in the present. In fact, for better or worse, that's usually the case. Try driving a car (forward) while only looking in the rear view mirror. Actually...don't.