Why Backtesting Matters
Backtesting is the process of running a trading strategy against historical data to see how it would have performed. It's the closest thing to a time machine in finance — and like any powerful tool, it can be misused. Telos includes a full backtesting engine with walk-forward validation built into every plan.
The Overfitting Trap
The biggest risk in backtesting is overfitting — optimizing a strategy so perfectly to historical data that it fails in live trading. A strategy that "backtests at 95% win rate" is almost certainly overfitted.
Telos addresses this with walk-forward validation, which splits historical data into training and testing periods. The strategy is optimized on the training period, then evaluated on the unseen testing period. This process repeats across multiple windows.
Key Metrics to Focus On
- Win Rate: Percentage of profitable trades (not the most important metric alone)
- Sharpe Ratio: Risk-adjusted return (higher is better, above 2.0 is excellent)
- Maximum Drawdown: Largest peak-to-trough decline (lower is better)
- Profit Factor: Gross profit / gross loss (above 1.5 is solid)
After backtesting, test your strategy with paper trading to validate it against live market conditions. For a deeper understanding of signal quality, see our guide on AI confidence scores.
Ready to start? Explore Telos's backtesting engine or create a free account to try it yourself.