Why Backtesting Matters in Algo Trading | Complete Beginner Guide

In this video, we explain how to backtest a trading strategy correctly before deploying it in the live market. Starting from a simple trading idea, we convert it into predefined rules and test those rules on historical market data to understand whether the strategy actually has merit.

You’ll learn why past performance does not guarantee future returns, but also why backtesting is a critical step to validate any trading idea. We also include real-world trading costs like taxes, charges, and slippage to bring results closer to reality.

A major focus of this video is risk analysis, especially:

What is drawdown
How to calculate maximum drawdown
Understanding drawdown duration
Evaluating whether a strategy suits your risk appetite

This video is extremely important for anyone interested in algorithmic trading, rule-based trading, or systematic strategies, especially beginners.

📘 Stay connected with Kotak Stockshaala for more videos on algo trading, backtesting, and strategy building.

⚠️ Disclaimer: Investments and securities markets are subject to market risks. Read all related documents carefully before investing.
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Timestamps:

00:00 – Introduction & Idea Validation
00:45 – Why Backtesting is Important
01:15 – Running Strategy on Historical Data
01:45 – Understanding Backtest Report
02:15 – Adding Taxes & Trading Costs
02:45 – Slippage Explained
03:50 – Realistic Profit Expectations
05:05 – Profitability vs Risk
06:10 – What is Drawdown
07:15 – Max Drawdown Explained
09:00 – Drawdown Duration & Psychology
10:55 – Risk Appetite Evaluation
12:25 – Introduction to Forward Testing

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