This is one of the most common problems among traders, especially beginners. You have developed a strategy and tested it on historical data, and it has shown amazing results. But as soon as you start trading on a real account, everything goes wrong: trades are not executed perfectly, profits fall, and sometimes you go into a minus. Why does this happen? Let’s get to the bottom of it.
1. Backtest Creates Ideal Conditions
When testing on history data, trading takes place in a vacuum, where:
- Orders are executed instantly at the desired price.
- No spreads, commissions, and/or slippages (or requotes if a broker has instant execution).
- No human factors (panic, fear, greed).
Things are not so rosy in the real market. The price can change while your order is executed, especially on the news and with high volatility. And if you trade large volumes, the market may not let you enter at the desired price.
2. Overfitting
A common mistake is creating a strategy that perfectly fits past data but does not work in the future. It is like studying for an exam, but you are given completely different questions on the actual exam. A good result in history does not guarantee success in real trading.
How to avoid:
- Do testing on different timeframes and instruments.
- Separate the data into practice and test data (out-of-sample test).
- Use walk-forward analysis.
3. Market Conditions Change
The market is not geometry, and it is not static. A financial market is a constantly evolving area. If a strategy works in a calm market, it may perform very differently in a high-volatility or crisis environment. Trends change, liquidity changes, and the algorithms of big players adapt – all this affects your trading.
4. Emotions and Trader Psychology
In backtesting, you just look at a chart and think, “Yep, here’s an entry, here’s an exit”. In real trading, when the price goes against you, you fear loss, start doubting, or break the rules. Ultimately, even a profitable strategy can become unprofitable because of your emotions.
5. Technical Problems
In the backtest there are no:
- Connection breaks and delays in order execution.
- Terminal or platform glitches.
- Unexpected gaps or sharp movements due to news.
But in real trading, all this happens. Especially if the broker does not provide high-quality execution.
How Do We Make the Backtest More Realistic?
- Take into account spreads and commissions – even a small commission can greatly affect the result. Add slippages – depending on the asset’s volatility, add 0.1%- 0.5% slippage.
- Test the strategy on the real market (forward-test) – first on a demo account, then on a real account with minimal volume.
- Watch the statistics – look at the maximum drawdown, stability of profitability, and risk/profit ratio.
- Avoid over-optimization – the strategy should work not only on history but also in real conditions.
Final Word
Backtest provides useful information, but you should not blindly trust its results. The real test of a strategy is trading in real market conditions. Use the backrest as a tool for preliminary evaluation, but always test a strategy with a small amount of real capital before increasing trading volumes. This is the only way to see if it works.