Backtesting Frameworks

---
name: backtesting-frameworks
description: Build robust backtesting systems for trading strategies with proper handling of look-ahead bias, survivorship bias, and transaction costs. Use when developing trading algorithms, validating strategies, or building backtesting infrastructure.
---

# Backtesting Frameworks

Build robust, production-grade backtesting systems that avoid common pitfalls and produce reliable strategy performance estimates.

## When to Use This Skill

- Developing trading strategy backtests
- Building backtesting infrastructure
- Validating strategy performance
- Avoiding common backtesting biases
- Implementing walk-forward analysis
- Comparing strategy alternatives

## Core Concepts

### 1. Backtesting Biases

| Bias             | Description               | Mitigation              |
| ---------------- | ------------------------- | ----------------------- |
| **Look-ahead**   | Using future information  | Point-in-time data      |
| **Survivorship** | Only testing on survivors | Use delisted securities |
| **Overfitting**  | Curve-fitting to history  | Out-of-sample testing   |
| **Selection**    | Cherry-picking strategies | Pre-registration        |
| **Transaction**  | Ignoring trading costs    | Realistic cost models   |

### 2. Proper Backtest Structure

```
Historical Data
      │
      ▼
┌─────────────────────────────────────────┐
│              Training Set               │
│  (Strategy Development & Optimization)  │
└─────────────────────────────────────────┘
      │
      ▼
┌─────────────────────────────────────────┐
│             Validation Set              │
│  (Parameter Selection, No Peeking)      │
└─────────────────────────────────────────┘
      │
      ▼
┌─────────────────────────────────────────┐
│               Test Set                  │
│  (Final Performance Evaluation)         │
└─────────────────────────────────────────┘
```

### 3. Walk-Forward Analysis

```
Window 1: [Train──────][Test]
Window 2:     [Train──────][Test]
Window 3:         [Train──────][Test]
Window 4:             [Train──────][Test]
                                     ─────▶ Time
```

## Detailed worked examples and patterns

Detailed sections (starting with `## Implementation Patterns`) live in `references/details.md`. Read that file when the navigation summary above is insufficient.

## Best Practices

### Do's

- **Use point-in-time data** - Avoid look-ahead bias
- **Include transaction costs** - Realistic estimates
- **Test out-of-sample** - Always reserve data
- **Use walk-forward** - Not just train/test
- **Monte Carlo analysis** - Understand uncertainty

### Don'ts

- **Don't overfit** - Limit parameters
- **Don't ignore survivorship** - Include delisted
- **Don't use adjusted data carelessly** - Understand adjustments
- **Don't optimize on full history** - Reserve test set
- **Don't ignore capacity** - Market impact matters

Run this skill on a real model without leaving the page. Every run is saved to your history for this skill.

How to use

1. 1Save the content below as SKILL.md in your agent's skills directory (e.g. .claude/skills/<name>/SKILL.md).
2. 2Or paste it directly into the conversation as context before asking the agent to do the task.
3. 3Adjust any project-specific paths or conventions mentioned in the skill to match your setup.