Backtesting and Paper Trading Guide: Test Your Strategy Before Real Money

What is a backtest?

A backtest applies a strategy's rules to past data to answer "what would have happened then?" It is powerful but can also mislead: a good-looking backtest does not mean it will work in real life.

A checklist for a trustworthy backtest

• Costs: include commission, spread and slippage. Try two different cost scenarios. See commissions and slippage in backtests.
• Out-of-sample test: tune the strategy on one period and try it on a period it has never seen. Be careful if the two differ a lot.
• Biases: survivorship bias and look-ahead bias (using information that was not known that day). See What is survivorship bias?
• Number of trades: do not trust a result built on very few trades.
• Drawdown: look beyond total return to the worst drawdown and how long bad periods last.

Why paper trading?

Paper trading runs the same rules on live data with no real money. It exposes problems a backtest cannot show: data delays, order-fill realism and whether the system runs without interruption. Do not move to real money before several weeks of steady paper results.

Backtesting across markets

Every market has its own data and rule differences. For an example see how to backtest on Borsa Istanbul.

Record results honestly

Keep good and bad results with equal seriousness. A bad result is not a failure; it is information.

This article is for education only and is not investment advice. Past results do not guarantee future results; trading carries a risk of loss.