Backtesting refers to testing a predictive model or a trading system using historical data. Traders use backtesting to test strategy ideas, compare strategy performance in different markets, time frames as well as determine optimal input parameter values for their systems.
Backtesting is proven to be useful for a couple of reasons. First, it is a method that provides concrete performance data for side-by-side strategy comparison. It eliminates guesswork and enables traders to apply scientific method to trading. Second, automated backtesting is a great time-saving tool. A good backtesting tool provides a way to iterate over thousands of parameter combinations and find the optimal ones. This process can be executed repeatedly on daily basis to ensure that a strategy stays fine-tuned using most up-to-date data.