{"term":{"slug":"strategy-backtesting","term":"Strategy Backtesting for Prop Firms","definition":"Backtesting a trading strategy with prop firm constraints explicitly modeled -- daily loss limits, maximum drawdown, and trailing or static floor mechanics. A strategy that survives historical markets may still fail a prop firm evaluation if its drawdown profile exceeds the firm's rules.","extendedExplanation":"Standard backtesting measures strategy performance in isolation. Prop-firm-constrained backtesting applies the firm's specific rules as termination conditions: the backtest stops not just when capital runs out, but whenever a daily loss limit or drawdown floor would have been breached. This reveals whether the strategy is survivable under the firm's rules, not just whether it is ultimately profitable.\n\nFor example, a strategy might show a 40% max drawdown over 3 years of backtested trading -- clearly profitable long-term, but every firm would have terminated the account dozens of times before reaching that profitability. Constrained backtesting surfaces this problem before you pay an evaluation fee.\n\nKey metrics to extract from prop-firm-constrained backtesting: evaluation pass rate (what percentage of 3-month simulated evaluation windows result in passing the evaluation), funded account survival rate (what percentage of 6-month funded windows avoid drawdown termination), and expected payouts per year. Firms with EOD trailing drawdown (TopStep) require different parameter tuning than firms with static drawdown (FTMO) -- the same strategy may pass FTMO evaluations consistently but blow TopStep accounts regularly due to the floor-rise dynamic.","exampleWithNumbers":"SMC breakout strategy backtested on ES 15-minute, Jan 2023-Dec 2024 (24 months). Unconstrained results: 58% win rate, 1:2.1 R:R, 18% max drawdown. Constrained with TopStep $100K ($3,000 EOD trailing): 12 simulated evaluation windows. 7 passes (58% pass rate). 5 failures all in high-volatility months (Aug 2023, Oct-Nov 2023, Aug 2024). Tweak: add volatility filter (no new entries when ATR > 1.5x 20-day average). New pass rate: 10/12 (83%). The unconstrained backtest showed a viable strategy. The constrained version identified the market conditions that would terminate the account.","category":"strategy","relatedTerms":["what-is-backtesting","trailing-drawdown","static-drawdown","evaluation-phase","win-rate"]},"_links":{"self":"https://runvigil.app/api/glossary/strategy-backtesting","page":"https://runvigil.app/learn/strategy-backtesting","allTerms":"https://runvigil.app/api/glossary","learn":"https://runvigil.app/learn"}}