Backtesting

Backtesting is the process of testing a trading strategy against historical data to evaluate how it would have performed in the past.

Backtesting lets you stress-test a strategy before risking real money.

What this tells you

Running a rule against historical data to see how it would have performed. The standard way of checking whether an idea has ever worked.

What it does not tell you

A backtest is a statement about the past wearing the clothes of a statement about the future. Test enough rules against one history and some will look excellent purely by chance — that is arithmetic, not skill, and it is why a strategy can look superb right up to the day real money is committed. Testing only on companies that still exist quietly removes every one that failed, which flatters any result. And a rule refined until it fits history well has usually been fitted to that history's accidents.

Further reading: Wikipedia