Over twenty years ago, someone asked me "how do you know your trend systems will be profitable if market conditions aren't the same as they have been?" From that point, I started backtesting technical indicators to develop trend signals and build complete trading systems that determine what to buy or sell, when, how much we should risk in each position, and when to exit a loser, laggard, and a winner.
The truth is, we can never "know" anything about a future that hasn't yet existed, but through a rigorous scientific statistical approach, we can develop trading systems and investment programs with mathematical basis for believing they'll be robust. But still, backtesting comes with a disclaimer for good reason:
Backtest Backtested Disclosure
Backtested performance does not represent actual performance and should not be interpreted as an indication of such performance. Actual performance for client accounts may be materially lower than that of the index portfolios. Backtested performance results have certain inherent limitations. Such results do not represent the impact that material economic and market factors might have on an investment adviser's decision-making process if the adviser were actually managing client money. Backtested performance also differs from actual performance because it is achieved through the retroactive application of model portfolios designed with the benefit of hindsight. As a result, the models theoretically may be changed from time to time and the effect on performance results could be either favorable or unfavorable.
Backtesting investment and trading strategies can be a useful tool for evaluating the potential profitability of a trading strategy, but there are also some risks involved that should be considered:
Overall, backtesting can be a useful tool for evaluating trading strategies to develop trading systems, but it should be used with caution and in conjunction with other forms of analysis and testing to minimize the risks involved.