Backtesting evaluates the viability of a trading strategy or pricing model by discovering how it would perform retrospectively using historical data.
The underlying theory is that any strategy that has performed well in the past is likely to perform well in the future, and conversely, any strategy that has performed poorly in the past is likely to perform poorly in the future .
When testing an idea on historical data, it is useful to reserve a period of time for historical data for testing purposes. If successful, testing it on alternative time frames or on out-of-sample data may help confirm its potential viability.
Capitulation occurs when a significant proportion of investors give in to fear and sell within a short period of time, resulting in a sharp drop in the price of a security or market against a backdrop of high trading volume.
Oversold is a subjective term. Because all traders and analysts use different instruments, some may see an asset oversold while others will see an asset drop even further.
The Accumulation/Distribution Line (A/D) measures the supply and demand of an asset or security by looking at where price closed in a period range and then multiplying that by volume.
A bull trap means a reversal that forces market participants who are on the wrong side of the price movement to close positions with unexpected losses.
A bullish engulfing pattern is a candlestick pattern that forms when a small black candlestick the next day is followed by a large white candlestick whose body completely overlaps or engulfs the body of the previous day’s candlestick.
Consolidation is a technical analysis term used to describe the price movement of a stock within a given range of support and resistance over a period of time.