Glossary term
Backtest
A historical simulation of how a strategy would have behaved.
A backtest applies a strategy's rules to past data to estimate returns, risk, turnover, drawdowns, and trading costs. A good backtest uses only information that would have been known at the time and includes realistic frictions. A bad backtest can look excellent simply because it accidentally used future information or ignored costs.
Example: Testing a monthly momentum strategy from 2010 to 2026, including rebalancing and trading costs, is a backtest.