Backtesting Best Practices

A well-designed backtest is the foundation of any systematic strategy. Here are key practices to improve reliability and avoid overfitting.

1. Avoid Look-Ahead Bias

Use only data available at the time of the signal. Never use future information when simulating historical decisions.

2. Account for Costs

Include commissions, slippage, and spread. Real trading incurs costs that can significantly impact net returns.

3. Use Out-of-Sample Testing

Reserve part of your data for validation. Strategies that work only in-sample often fail in live markets.

4. Consider Multiple Market Regimes

Test across bull, bear, and sideways markets. A strategy robust across regimes is more likely to hold up.

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