Why Backtests Lie
The biases that make a strategy look brilliant on paper and lose money in reality.
Lessons
- Look-Ahead BiasUsing information you could not have known at the time — the most common way a backtest cheats.
- Survivorship BiasTesting only on companies that survived ignores all the ones that died. The graveyard matters.
- Overfitting: Memorising the PastAdd enough rules and any strategy looks perfect on history and useless tomorrow. How to catch it.
- The Multiple-Comparisons TrapTest 1,000 strategies and a few look great by pure luck. Why a low p-value is not enough.
- Bull-Market GeniusA strategy that only ever saw a rising market has not really been tested. Cover the bad years.
- Probability of Backtest OverfittingA formal way to estimate how likely your great backtest is a fluke — and act on it.