Backtesting (finance)
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Backtesting is an investment strategy, largely discredited, which assumes that the behavior of financial instruments follow the same pattern they have followed before. The strategy neglects the Random walk hypothesis, also known as the Random walk theory, which states that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. Usually with aid of computers, traders use programs to try to predict the financial instrument based on how it has behaved in the past according to historical prices or historical chart patterns or similarities in chart patterns. Such computer programs fall into many categories based on the ability of the trader to view and/or alter the source code and informally named after colors. A "Black Box" for example is one you don't know the code and simply displays signals to buy or sell. A common program that uses Backtesting is TradeStation.
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