Testing a strategy on historical data to evaluate its performance before risking real money.
Example
Before trading a strategy with real money, you test it on historical data: would your RSI rule have worked over the past two years? You measure hit rate, average risk-reward and maximum drawdown. Beware overfitting — a strategy that looked perfect in the past can fail in the future. That is why backtesting is always followed by forward-testing on a demo account before real capital flows.