Backtesting runs your strategy against historical market data and reports how it would have behaved. It's the first check on whether an idea has merit — before paper trading, and long before live capital.
How to run a backtest#
- Build or open a strategy in Strategy Studio.
- Choose the market and the time period to test over — ideally one that includes different conditions (trending, ranging, volatile), not just a favourable stretch.
- Run it. Liquid Edge simulates the strategy over that history and reports the results.
Read the results honestly#
Look past the headline return to the numbers that tell you whether a strategy is survivable:
- Maximum drawdown — the deepest peak-to-trough loss. Could you hold through it live?
- Number of trades — a handful proves nothing; a few hundred starts to mean something.
- Win rate and reward-to-risk together — neither number means much alone.
- Consistency — is performance spread across the period, or driven by one lucky run?
Avoid curve-fitting#
A backtest tuned until it looks perfect on past data is usually useless on future data. Keep rules simple, prefer strategies that stay robust when you nudge the inputs, and don't trust a result that falls apart with small changes. This is covered in depth in Testing a Strategy.
Backtest, then paper#
A backtest is history — it is not a promise about the future. Always follow a good backtest with a forward run in Paper Trading before going live.