Forex Backtesting

For beginners to the foreign exchange trading markets, forex backtesting refers to the use of historical data to work out trading strategies. A computer program is employed to test your trading system over a historical period of time. This allows you to test how effective your system is against historical data.

A forex backtest program is the easy way to play around with your trading techniques. You can experiment to your heart’s content, safe in the knowledge that you are in no danger of throwing your life savings down the drain.

However, there are few things to watch out for when using forex backtesting. For one thing, a strategy that works brilliantly when tested against historical data might not be anywhere near as good when used in the current foreign exchange markets. The forex market today is inevitably different to the forex market of two years ago for example. This is because the foreign exchange markets are continuously evolving due to many variables and the past is never going to be replicated exactly in the future.

It is very easy to get all excited when you think you have discovered a trading system that is foolproof, but if backtesting was the simple way to creating a great trading strategy, we would all be billionaires by now!

So remember, you need to beware of assuming that your brilliant and innovative forex trading strategy is the golden ticket to a lifetime of Ferraris and glamour models. The reality is that your strategy might not work half as well when used in the current prevailing foreign exchange markets.

Many people sell forex trading systems claiming that they have great backtesting results. If you are considering buying one, make sure you check whether or not the results are hypothetical or actual. If the results are hypothetical, then they are purely based on backtesting using historical data, which means that the system might be worthless when used today.

There are many different versions of forex backtesting software available for the budding forex trader. The good news is that some are very inexpensive or even free. Of course, you can spend thousands of dollars on a fancy forex backtesting software package if you prefer, but why bother when you can use a program like excel for peanuts?

You will need historical data to work with while you are playing around testing your trading systems. You can obtain historical data from a variety of sources, including brokers you trade with, so ideally make sure the data you end up with is complete and preferably free. If you do decide to buy historical data off the Internet, check it out thoroughly to make sure there are no big time gaps or gigantic holes in the data. If there are, it will be useless.

When you have your backtesting software and data, you can spend as long as you like perfecting your systems and playing around with the charts and results. Once you think you might have found a reliable trading strategy, the time has come to test it out for real!

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