Proper forex strategies are one of the critical elements that a successful trader must have. This is because they create an appropriate guideline of how the trader will handle the market situations and changes. However, coming up with them is not the end as you will still need to test and analyze them. This write up will give you proper guidelines of how you can effectively test them.
There are two main backtesting methods: the manual method and the automated method. Whichever method you decide to you use to test your strategies, the process should help you to analyze all the situations which arise.
Manual backtesting is done by manually scrolling a bar to bar with the forward arrow of your keyboard. The method can be quite arduous and timely. It is also prone to human mistakes and errors. For instance, it can be quite hard to find out the specific currency pairs which generated lower price points by looking at a piece of paper.
Manual testing involves four main steps:
Step 1: open the currency pairs chart which you want to test. After that, scroll on to the previous chart. In most online trading platforms, you can opt to drag and drop then change the date of the chart. You should also make sure that the trading indicators, as well as the other trading tools, go in hand with the strategy you have applied.
Step 2: spot any trade setups in your charts by scrolling and looking at them, one by one
Step 3: since you have probably found a trade set up by now, write down the trend results that you observe. You can do this by using an excel spreadsheet where you record all your observations.
Step 4: repeat the same process several times and come up with clear results.
As earlier mentioned, you can find the manual backtesting quite tedious especially if you are going through a tremendous amount of data. However, don’t be afraid. Press on because its results will help you to pinpoint the essential things before you apply the strategies in real trading.
Here, the trader uses an automatic program which opens and closes the trades on their behalf. Some of the programs which you can use for the automated testing include the Expert Advisors who are usually based on special algorithms.
The process of backtesting while using this method is straightforward, this is because you simply need to set the programs and then observe the results late. The only drawback of automated testing is that it might be quite costly to get the software. Also, the system does not allow you to get trading experience since it does everything. It is, however, the best option if you don’t have enough time to do the manual backtesting.
The importance of backtesting your forex strategies
The main importance in practice – backtesting helps you to practice how you will apply them in the live market, whether the markets are opened or closed. It also screens your skills so that you can always meet your market criteria, especially if you have many strategies. Practice also boosts your confidence so that you can use them in the live markets without fear.
Backtesting also helps you to:
- To see how the system would perform earlier enough before you start the CFD trading
- It provides a rough idea of the system’s metrics, as well as the average loss and wins size
- Through the backtesting, we can discount the synergies when which performs poorly.
Closing thoughtsDon’t take anything lightly when developing a system. From coming up with the strategies to writing them down to testing them, everything should be taken seriously and done in an orderly manner. Avoid complicated strategies as they may confuse you more in the backtesting stage. Start with a simple strategy and check if they align well with the current market environment. If