Backtesting shows a trader how their signals for entries and exits would have performed in the past. While a backtest of past data doesn’t guarantee that a signal will work in the future it can quickly show you what didn’t work. What a backtest is really showing a trader is that an entry and exit signal created good asymmetric risks by cutting losses short and letting winners run over and over again. All a backtest is trying to do is make the winning trades bigger than the losing trades over time.
While there are many books that show how to backtest signals and systems there are very few that show backtested data on historical price data. Seeing backtested signals and trading them in real time with money on the line are very different things. However, seeing results can give you ideas on how to backtest your own theories and create a trading strategy that fits your own risk tolerance and return goals.
The first step is to test charts for profitable signals then the second step is to combine them together for diversified trading systems. A good trading system will have diversified signals and a diversified watchlist of different types of markets so that it rotates capital into charts in trends or swinging in price.
The following books are a great place to start to both learn about how to backtest and examples of trading signals that backtest with an edge.
Buy the Fear, Sell the Greed: 7 Behavioral Quant Strategies for Traders by Larry Connors
Following the Trend: Diversified Managed Futures Trading by Andreas Clenow
Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies by Andreas Clenow
Trading Evolved: Anyone can Build Killer Trading Strategies in Python by Andreas Clenow
How to Beat Wall Street: 20 Trading System Ideas For Stocks by J. B. Marwood
Short Term Trading Strategies That Work by Larry Connors and Cesar Alvarez
50 Moving Average Signals That Beat Buy and Hold by Steve Burns
5 Moving Average Signals That Beat Buy and Hold: Backtested Stock Market Signals by Steve Burns
Trading Tech Booms & Busts Backtested $QQQ Moving Average Systems by Steve Burns
Moving Averages 101: Incredible Signals That Will Make You Money in the Stock Market by Steve Burns
