Backtesting is the process of testing a trading strategy on historical data to see how it would have performed in the past. Theoretically, if a system worked well in the past, it will work well in the future. Of course, market conditions can change, but not critically.
Immediately after learning the material, sitting down and trading what you’ve studied is not the best option.
You can roll the chart back and analyze each movement, making decisions on what you would have done. This process can show you how the price behaves and how your tools can help you trade.
There are many variations of backtests.
It all depends on what you want to understand. For example, beginners often struggle to understand what conditions should be inside HTF POI on LTF. Building liquidity, aggressive BMS, and entering at the discount zone from an order block are all good, but in the moment, beginners will find it difficult to make any decisions and will likely miss a position or take a stop. Therefore, without rolling the charts back and understanding how the price behaves, you won’t be able to trade adequately. Trading without backtesting may teach you something, but it will take more time and can affect your psychology. The best option is to find 10, 20, 30 situations in the past, analyze them, take notes, and then, understanding how to work in this situation, move on to live trading.
Suppose you want to understand your win rate when trading just order blocks in discount zones from a higher timeframe perspective. Win rate is the ratio of the number of profitable trades to the number of losing trades. In other words, the win rate shows how often a trader will make successful profitable trades compared to how often they will lose money in their trades. By taking the last 10 situations on the chart, you will understand whether this setup is profitable. If the win rate of the setup is 50% or higher (5 positions stopped out and 5 positions closed at take profit) and above - this is a good result. Because trading with an RR of 1:5 and risking 1% per position, you will get a 20% return on the deposit. When trading with high RR, the win rate is not so important, because having a win rate of 10% while constantly trading with an RR of 1:20 - you will make a 10% profit even if only one out of ten trades is profitable.
What I just described is called strategy backtesting.
You can also do simple backtesting by rolling the chart back and moving along with it, making decisions in the moment about whether you would enter a position or not. The main advantage of this is that you will immediately see if your guesses were correct or not. Ideally, you can keep a journal and then analyze your positions. When trading Forex, if I missed one day without sitting at the chart, I analyze what happened during the London and New York sessions. I also know the entire history of BTC by heart, as I have rolled the chart back many times for myself and tested strategies.
Suppose you want to add another setup to your arsenal. Immediately going to the chart and trying to trade it live is not effective; you will lose some money. It is best to first test it on past situations, understand what risk-to-reward ratio you can average per trade, calculate the win rate, and then decide if it suits you.
People who have just completed training should spend a lot of time on backtesting and preferably keep a journal for a month, taking screenshots of situations and then analyzing all the work done each week. Beginner traders who immediately start trading after training may not achieve success right away, not because they didn’t understand the tools but because they don’t know how to apply them on the charts.
The goal of backtesting is to review historical charts and attempt to apply what is taught in the course as a way of practicing the strategy so that you can make subjective decisions based on the material rather than blindly following parameters.