Definition
Backtesting is the process of testing a trading or investment strategy using past market data. It helps investors understand how a strategy would have performed in the past before using it in real markets.
Example
A trader creates a strategy to buy a stock when its price falls below Rs 500 and sell when it reaches Rs 550. They apply this rule to past price data to see how much profit or loss the strategy would have made. This process is called backtesting.
Caution
Backtesting is based on past data, so it does not guarantee future results. Market conditions can change, and a strategy that worked earlier may not work the same way in the future.