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Trading and Investment Terms

Back Testing

Backtesting involves applying a strategy or predictive model to historical data to determine its accuracy.

 

It allows traders to test trading strategies without the need to risk 

capital.

 

Common backtesting measures include 

  • Net Profit/Loss
  • Return: The total return of the portfolio over a given time frame
  • Risk-Adjusted Return: The return of the portfolio adjusted for a level of risk
  • Market Exposure: the degree of exposure to different segments of the market
  • Volatility: The dispersion of returns on the portfolio

 

 

In simple words, backtesting a trading strategy is the process of testing a trading hypothesis/strategy on prior periods.

The two main components 

  •  The overall profitability 
  •  The risk level

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