Backtesting Frameworks
Build robust, production-grade backtesting systems that avoid common pitfalls and produce reliable strategy performance estimates.
When to Use This Skill
- Developing trading strategy backtests
- Building backtesting infrastructure
- Validating strategy performance
- Avoiding common backtesting biases
- Implementing walk-forward analysis
- Comparing strategy alternatives
Core Concepts
1. Backtesting Biases
| Bias | Description | Mitigation |
|---|---|---|
| Look-ahead | Using future information | Point-in-time data |
| Survivorship | Only testing on survivors | Use delisted securities |
| Overfitting | Curve-fitting to history | Out-of-sample testing |
| Selection | Cherry-picking strategies | Pre-registration |
| Transaction | Ignoring trading costs | Realistic cost models |
2. Proper Backtest Structure
Historical Data
│
▼
┌─────────────────────────────────────────┐
│ Training Set │
│ (Strategy Development & Optimization) │
└─────────────────────────────────────────┘
│
▼
┌─────────────────────────────────────────┐
│ Validation Set │
│ (Parameter Selection, No Peeking) │
└─────────────────────────────────────────┘
│
▼
┌─────────────────────────────────────────┐
│ Test Set │
│ (Final Performance Evaluation) │
└─────────────────────────────────────────┘