I have seen quite a few messages here on the dangers of backtesting to develop/prove systems so thought I would share the system I have used which (in my opinion) allows you to backtest with some confidence.

Firstly to backtest with any confidence you need a good sample size - I personally have a database with several years data (although the older data has some limitations so some of my testing is limited to the more recent data). I think you need at least 6 months data and preferably a full year.

Divide your sample data into 2 parts - doesn't really matter how - for simplicity you can put the first half of the data in "Part A" and the other half in "Part B". If you are concerned about seasonal influences then put alternate months in each group (eg. Jan, Mar, May in "A"; Feb, Apr, Jun in "B")

Now you use the "Part A" data to develop and test your ideas - when you have come up with something that seems to work you can then test it against your "Part B" data. When you are doing this testing you MUST apply the rules/system you have come up with as if you are betting with real money and you should make your bet decision based on the form, etc without looking at the results first.

If your system shows a similar profit against the "Part B" data then you should have some confidence that it is valid and hopefully will work in the future as well. If it makes a loss or if the profit is significantly lower than on the "Part A" data then you should go back to the drawing board and revise your system (again using the "A" data for development and the "B" data for testing.)

One other thing to be aware of is that you should always use the same type of data for developing a system as you are going to use when betting. So if you are only going to bet on Saturday Metro meetings then only use Saturday Metro data for development and testing.

As always I am happy to try to answer any questions or comments.