1.4 Backtesting

Backtesting is the process of executing a given strategy on historical data to determine what its performance would have been had it been used on a certain time t in past. Price-only would not incorporate volume and limit orders (liquidity) available. Limit orders allow for an educated guess whereby it is assumed that trades are filled by those and therefore ignores the time priority of all other limit orders at the same price level. Another uncertainty during the backtest is whether the opposing entry which was chosen during the matching process would have actually remained in the book, as it would have been possible for the other trader to cancel his order shortly before the arrival of the to be placed order.