Backtesting is the process of testing a trading strategy using historical market data to evaluate its effectiveness before applying it in live trading. This method allows traders to analyze how a strategy would have performed under various market conditions, helping them identify its strengths and weaknesses. By simulating trades based on past price movements, traders can refine their strategies, optimize parameters, and gain confidence in their approach. Backtesting also helps in understanding risk-reward ratios and drawdowns, which are essential for effective risk management. However, it’s important to note that past performance does not guarantee future results, so traders should combine backtesting with forward testing in a demo account to validate their strategies in real-time market conditions.