Without back testing back in the days, perhaps i wouldn’t be as profitable as i am today. Back testing gave me the whole new different world of trading and opened my eyes the potentials of the Forex market. But wait a minute…. ✋ What is Back testing? It is putting your strategy at work using the previous market data. We successful traders do this to see whether the strategy is reliable or not and how it behaves in different conditions of the market. I d advice you to back test your strategy with a longer time span and data for about 5-15 years and doing it on a shorter period can only catch a different type of market either bull or Bear market and end getting inaccurate results.
METHODS OF BACK TESTING
Automated back testing involves creating a program that automatically opens and closes trades for you. These programs, such as Expert Advisors (EA) on the ,Meta trader Platform , are usually based on a technical algorithm, and will open and manage the trades for you when certain technical conditions are met (for example, a Stochastic’s overbought/oversold crossover).
This way of trading involves creating, or buying the program itself, which can be either time consuming or expensive.
It also doesn’t add to your trading experience, and I don’t recommend this way if you’re serious in becoming a successful trader. You need to feel the market in order to become experienced. That’s why we will focus on manual back testing in this article.
Manually Back testing a Forex Strategy
Manual back testing is when you manually scroll the chart on your trading platform to a previous period, and then manually go forward, bar by bar, with the “forward” arrow on your keyboard. Doesn’t sound exciting? Well, this the best way to see how your strategy will perform in various market conditions, and where it needs improvement.
There are four steps when manual back testing a trading strategy.
Step 1: Open the chart of a currency pair on which you want to back test your strategy, and scroll the chart to a previous period. On most trading platforms, you can simply drag & drop to change the date of the chart. Also make sure that all indicators and other tools that are part of your strategy are applied to the chart. In our example, we will use a simple moving average crossover strategy on a daily time frame.
Step 2: Move the chart bar by bar and spot possible trade setups.
Step 3: Now that you found a trade setup based on your trading strategy, you will need to write down the trading results of the imaginary trade that you’ve taken. You can do this with a simple Excel spreadsheet, where you enter the date, entry point, stop-loss, take-profit, reward-to-risk ratio or any other information you think might be of interest to you.
Step 4: In this step, you’ll repeat the process until you find a possible trade setup again, after which you go back to Step 3.
Manual back testing can be time-consuming, but it’s the best way to feel how your trading strategy would work in various market conditions. If you back test on a daily chart, 10 years’ worth of data has around 2500-3000 bars, and it’s perfectly possible to go through all of them in a few hours of work.
Don’t be afraid of the amount of data, as back testing your strategy is the most important point before you start using your strategy in real trading.
Why You Need to Back test Your Strategies
Back testing is one of the most important points in the process of developing your trading strategy. It will reveal how your strategy will perform in various market conditions, and answer the most important question: is it profitable? However, have in mind that past results are not an indication of future performance.
Your back testing might show that your strategy would work in the past, but the market changes all the time and a strategy that was once profitable, could become unprofitable in the future.
Take Care and have a great week Ahead.