Backtesting is a term used in oceanography, meteorology and the financial industry to refer to testing a predictive model using existing historic data. Backtesting is a kind of retrodiction, and a special type of cross-validation applied to time series data.

Backtesting is the process of testing a trading strategy on prior time periods. Instead of applying a strategy for the time period forward, which could take years, a trader can do a simulation of his or her trading strategy on relevant past data in order to gauge the its effectiveness. When you backtest a theory, the results achieved are highly dependent on the movements of the tested period.