Stock Market Glossary
Backtest
Testing a trading strategy on historical price data.
In brief: Testing a trading strategy on historical price data.
Meaning in practice
Backtests check how a strategy would have worked in the past. Common pitfalls: survivorship bias, lookahead errors, overfitting to historical peculiarities. A good backtest includes realistic costs, slippage and out-of-sample testing.
Context for investors and traders
The term describes a common behavioural bias that can become especially visible during sharp market moves. It is not a judgement on individual investors, but a prompt to make decisions understandable and repeatable.
How to use this in practice
A simple decision process is an effective countermeasure: note the trigger, set objective and risk, then act. It makes clear whether a decision rests on testable information or on FOMO, fear or the urge to recover a loss quickly.
What to keep in mind
Review decisions at calm intervals instead of after every market move. Changing rules retrospectively removes the benchmark; following them rigidly should still leave room for genuinely relevant new information.
