Five Backtesting Pitfalls That Fake Your Sharpe

1. Lookahead bias

Using data that wasn’t available at decision time. Point-in-time databases are non-negotiable.

2. Survivorship bias

Backtesting on today’s index constituents overstates returns by 1–2% annually.

3. Unrealistic cost models

Flat cost-per-trade assumptions break down for anything beyond small size. Model spread, impact, and borrow.

4. Overfitting

If you tested 100 variants and report the best one, your Sharpe is a statistic of the maximum, not the strategy. Use deflated Sharpe ratios.

5. Regime blindness

A strategy validated in one volatility regime often dies in the next. Walk-forward across regime boundaries or don’t ship it.