Backtesting

Categories: Metrics

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.

Related or Semi-related Video

Finance: What is a Prospectus?14 Views

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Finance a la Shmoop. What is a prospectus? Well it's just a marketing document,[prospectus book]

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selling money and it outlines the basics of the investment, that the money being

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raised is actually going for. That is like, what does the business do

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for a living? How much revenue has it produced the

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last few years? How much profit? How many units of whatever were sold? What did

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those units cost the company to produce? Who's running this show and did [list of questions]

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they have any felony convictions? Who's on the board? Any lawsuits outstanding

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against the company? Yah it's stuff like that. So prospectus, is the set of papers

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that covers all of the above and goes out with a new security that's being

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offered to buyers and that can be equity and or debt and or both. Prospecti are

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generally given for larger financial offerings. That cover more than just

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sophisticated investors. For small private offerings, money is raised via a

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very simple contract. Usually just a few pages are so. Covering the basics that a [man signing contract]

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prospectus we cover and that includes what common industry parlance refers to

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as a big boy letter. Meaning that if the investment goes fully bankrupt, that you

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by signing here, you represent and warrant that you are a big boy or girl

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and that you have the financial sophistication to understand the risks

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and you won't cry about things if they turn sour. But small investment which

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carries extremely high risk of full failure. [man walking with papers] Yeah those are usually done by

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professionals ie the wealthy. So the government doesn't view them as needing

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the same kind of training wheels and safety netting that the average Joe Blow

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needs when he's making an investment. Prospecti are required in registered

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offerings, to protect the average investor, from sleazy wheeler dealers. Who

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might not disclose that the wastewater from the company's chemical processing

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plant did in fact produce three headed fish downstream. As cool as it is to have[3 headed goldfish]

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three headed fish, well three headed people, less cool. So it might be a

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problem for that fertilizer producer in the future. That prospectus marketing

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document reflects the fact that the company, is you know, prospecting for

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money here. And in the process the company has to disclose all the basics

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about what it's raising the money for, the good, the bad, and

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the three-headed. Yeah glug-glug that's a prospectus. [man in study with scotch]

Find other enlightening terms in Shmoop Finance Genius Bar(f)