Backtesting is the process of evaluating a trading strategy by applying it to historical market data to see how it would have performed. It’s a critical step in algorithmic trading and strategy development because it helps traders understand the potential profitability and risks of a system before committing capital. Platforms like Olympus AI can run complex simulations that incorporate historical prices, news events, and even simulated trader behavior. Proper backtesting requires accurate historical data, realistic transaction cost assumptions, and statistical rigor to avoid “overfitting” — designing a strategy that works well on past data but fails in real markets. The results help traders fine-tune entry and exit points, risk controls, and position sizing. While not a guarantee of future success, backtesting is an essential tool for validating and improving investment strategies.
