Backtest Fundamentals

A backtest is a simulation of how a strategy might have performed in the past based on historical data. While it provides useful insights, there are several important assumptions and limitations to be aware of when interpreting backtest results on YouVest.

Key Facts

• All backtest statistics are hypothetical and designed with the benefit of hindsight.
• Past performance is not a reliable indicator of future performance.
• Backtests estimate potential performance over time and in various market conditions, but they do not constitute recommendations for any specific trading decisions, past or future.

Data Sources

Backtests utilize daily adjusted closing prices of assets to simulate past decisions and calculate return statistics. These prices are adjusted for corporate actions, such as stock splits or dividends, and do not represent actual trading day quotes.

Real-Time Trading

When strategies are traded live, decisions are made using real-time data, reflecting actual market quotes. Therefore, actions taken in a backtest should not be directly compared to live trading decisions, as market conditions and data availability can differ significantly.

Time of Day

Trading periods can affect strategy outcomes. For example, decisions made during a specified trading window (e.g., 3:50 to 4:00 PM ET) may differ from those made using closing prices, especially during periods of high market volatility. Variations in execution times can also lead to different outcomes for the same strategy.

Dividend Reinvestment

Backtests account for dividends and distributions, assuming they are reinvested into the strategy. This mirrors the automatic reinvestment of dividends in live trading.

Slippage and Fees

Backtests simulate fees to provide a more realistic performance estimate:

Benchmarks

Benchmarks and financial indices are provided for illustrative purposes and may not directly compare to individual strategy performance due to differing strategies, volatility, and other material characteristics. Benchmarks do not reflect trading commissions, fees, or management costs, and their historical performance does not guarantee future results.

Assumptions and Methods

Material assumptions in calculating hypothetical results include:

• Profits are reinvested into the strategy.
• Initial investment sizes are based on the amounts shown in performance charts.
• All relevant fees, including subscription costs and broker commissions, are estimated and included.
• Maximum drawdown is calculated based on the largest percentage decline from a local peak to a subsequent low point on the equity chart.

Trading Risks

Trading involves substantial risk, and there is a significant possibility of loss. It is crucial to only trade with money you can afford to lose, as online trading of stocks, options, futures, and forex can be extremely risky.