How to Test Forex Strategies

Internet is packed with numerous paid strategy offers which promise to “reveal forex secrets” for hundred bucks. Designing a strategy to fit your individual trading style is complicated and time-consuming process. The truth is that there are no secrets about forex trading. What really matters are experience, dedication and, when it comes to forex strategies, an old fashioned trial and error testing. The question is, how is testing a strategy done? Are there any special tricks you need to know?

While figuring out a forex strategy, it is important to decide what kind of trader you are.  Even if you take a strategy from another trader, it is your up most responsibility to analyze it and fit it according to your needs. Every forex trader is different when it comes to executing trades. Two traders using the same system may have different; therefore it is crucial to take it slow. The more you understand your trading system and forex market, the better your chance for consistent profits.

For most traders backtesting a strategy is a painful and long process. Becoming comfortable with your strategy requires a lot of time testing it via free demo account.  It can take up days, weeks or even longer. Despite the massive amount of time needed to perfect the strategy, it is the only way to make things work.

So, what are the steps for Testing Forex Strategy?

First of all, history tends to repeat itself. Therefore, historical data is a necessity for backtesting. You can purchase historical data from data providers for a reasonable price. Yes, you have to pay for it, because the good quality data is just too vital for professional forex trading. Once you have an access to historical data, you can backtest it, one bar at a time and look for entries/exits to see the results.

The key to backtesting, just as to the whole forex trading concept,  is patience.  Make sure to demo trade your strategy in progress for at least 100 trades. You never know when a nasty surprise can hit you, but the more you test, the more chances that there will be less pitfalls on your way.

Once you go live with your forex strategy, increase the account funds used in trading gradually. You can trade live with, let’s say, 0.1% of the account in the beginning. Then increase by an extra 0.1% after every successful trading week. Speaking of presents, try not to risk over 1% – it is just not worth it as this point.

While backtesting the system, keep a journal of the trading data stats from the forex market and try to develop mental and physical image of how the market behaves. This way you will be able to pull your strategy to the right direction to fit the specific conditions of the market, without ditching the whole fundamental set up of the strategy.

Traders often argue about the need of backtesting, what really works and what does not. There are traders who claim to win with mechanical system, saying that backtesting is a waste of time. The strong believers in mechanical strategy trust the system to fit the past data and consider those who backtest – inexperienced believers in repetitive pattern in market behavior.

On the other hand, there are traders who are convinced that there is no way to profit in forex without analyzing the full picture fundamentally. There are a lot of different ways to make money in forex and the beauty of this game is that nobody is wrong, and nobody is right. The holy grail of the whole concept of forex is to find the way that fits the trader in you. Don’t listen to what others say – find what is right for your trading personality.

I personally found out that backtesting is the right way for my personality. Development of trading skills from the basics of lower lows, higher highs, s/r, entries, exits, trade management, spotting different market conditions, money management, greed control etc. makes me a better trader – a forex trader well prepared for live forex market.

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