Backtesting is based on analyzing past data to find a formula or system that yields the highest success rate.
So far, so good, because you'll always find something that shows a positive percentage. The problem is that you won't know if it will behave the same way in the future. But chances are, it won't. In fact, many systems that you think work will stop doing so shortly after.
And that’s not even considering if the system becomes well-known in the trading community...
This happens because every time you close a trade with a profit, someone else has to close it with a loss—meaning, for there to be winners, there must be losers.
Note: Just understanding this should be enough to realize that backtesting is as pointless as searching for an automatic trading system.
I know exactly what phase these traders are in: the initial one. It's a stage where they can’t find the "Holy Grail," leading many to abandon their goal while others try to sell a system that doesn't work and never will, just because they need to somehow recoup the time wasted searching for it.
Therefore, those who try to achieve consistency through an automatic trading system are mistaken.
But why were automatic systems invented in the first place?
Backtesting emerged when traders understood, in some way, that they needed to detach themselves from their instincts when making trades.
Primarily fear, impatience, greed... The entire psychological drama that comes into play in trading causes devastating failures in a trader's account, hence the search for an automatic system that prevents emotions from influencing trading decisions.
However, they will repeatedly and desperately realize that the wonderful results the system offers in simulation (almost always over-optimized) don’t translate to the real world.
This is because the market is unpredictable; systems can’t react to its rapid movements, and when they do, much of the potential gain has already been lost. Often, the trade is opened just before the market reverses direction. This is even more evident the smaller the timeframe in which you operate.
Therefore, the trader understands from the beginning that basic human instincts are detrimental to successful trading, so they use these automatic systems to prevent those instincts from affecting their trades.
They are correct in this regard, but they miss the mark when it comes to using the correct method, which is money and risk management. This is the only method that effectively nullifies our primary instincts.