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12. Backtesting
Testing systemic strategies against historical market data.
Prove It With Data
You shouldn't trade a strategy with real money unless you know its historical expectancy.
- Expectancy: The average amount you expect to win (or lose) per trade. Calculated as: (Win Rate * Average Win) - (Loss Rate * Average Loss).
- Drawdown: The peak-to-trough decline of a portfolio. A 50% drawdown requires a 100% gain just to break even.
- Overfitting (Curve Fitting): Creating a strategy with too many specific rules perfectly tailored to past data, which immediately fails in live markets.