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Backtesting is where traders simulate trades on historical data to assess a strategy's potential profitability, risk, and consistency, providing insights into how it might perform under similar market conditions in the future. A backtest report will display the strategy's historical win/loss percentage, risk-to-reward ratio and many other statistics to help a trader understand the strategy's strengths and weaknesses.

Backtesting limitations

Past performance is not always indicative of future results. Changing market conditions, economic factors, and sentiment can reduce the profitability of a strategy which was successful in the past. Through experience, a trader can judge the performance of a backtest and adjust it to the current market conditions.

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