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I noticed that some traders use backtesting to evaluate their trading strategies. What I don't understand is: how do they separate the predictive power of their trading strategy from the general market trend when interpreting the backtest results?

For example, long-only trading strategies will likely show good performance during rising markets, even if some of those strategies have no predictive power at all. Similarly for short-only trading strategies during declining markets. There must somehow be a way to remove the effect of market trends if the predictive power of a strategy is to be measured. I imagine that the real life situation is more complex than what I have just illustrated, because some strategies involve both long and short positions (at different times).

Flux
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I'm not sure that I agree that a strategy has 'predictive power'. That's probably a separate debate which I'm going to sidestep.

Long strategies perform well in up markets and short strategies perform well in down markets. So either you have to have something that suggests what type of market you're in (easier said than done), or you have to have a mix of long and short strategies, or you have to have something that is agnostic to direction (trading volatility).

FWIW, 25+ years ago I went through a technical analysis phase with a group of clever people. I'll spare you the details/conclusions but one thing we all had in common we had was that we all used a software program that could backtest any strategy that we could formularize.

The backtesting provided 3 sets of stats: long only, short only, and both. Now while those results didn't quantify the amount that the general market trend contributed, it surely indicated its affect.

Bob Baerker
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There must somehow be a way to remove the effect of market trends if the predictive power of a strategy is to be measured.

This is the meaning of Alpha. Your returns minus the market return equal Alpha.

As Larry Page wrote in announcing Google's new holding company, Alphabet:

For Sergey and me this is a very exciting new chapter in the life of Google—the birth of Alphabet. ... We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!

EDS
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Orange Coast- reinstate Monica
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Yours is a question that is rampant in the industry, especially in quantitative finance. Let me put it this way: no company will ever offer a product with poor back tested results.

Any predicative power of a backtest, in my opinion, must be tested in different market environments so as to separate the power of the strategy from the prevailing market trends at the time. For example, can you get a picture of how the strategy did in periods of both rising and falling rates? How about periods where certain factors (growth/value/dividend, size, etc.) or certain sectors or subindustries (finance/consumer discretionary/technology, etc.) did well?

EDS
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