Explain the importance of backtesting and stress testing in evaluating the performance of trading strategies, and discuss the limitations of these methods.

Backtesting and stress testing are essential tools for evaluating the performance of trading strategies. Backtesting involves applying a trading strategy to historical market data to assess its past performance. This helps traders understand the strategy's profitability, risk, and potential drawdowns. For example, a trader might backtest a moving average crossover strategy by applying it to the historical price data of a stock. This would reveal how the strategy would have performed in the past, allowing the trader to gauge its potential success in the future. Stress testing, on the other hand, involves subjecting a trading strategy to extreme market conditions, such as a sharp m....