Why back testing is so important on Forex?
If you believe you have found a potentially great Forex trading system and you are ready to jump into the foreign currency exchange trading market, then take a little time to thoroughly check the back testing before you begin.
What is Back Testing in Forex?
Back testing is a way to confirm that the EA or trading system you intend to use actually does what it intend or seems to be. Nevertheless, your Forex trading system will become pointless if it can't perform the way you thought it was going to.
However, you will also need to know that your Forex trading systems are going to work under many diverse conditions and not let you down at crucial moments.
Why Back Testing is Important in Forex?
Forex back testing is the place where you enter a set of historical data and then see how your chosen EA or trading strategy would have fared against actual data. Your system will have certain strategies in place, so by entering accurate historical data from the market and then analyzing which trades your system would have recommended is one way of learning whether your system's strategy is going to work for your trading style and goals.
Another benefit to back testing Forex systems is that you'll be able to pick up any issues or flaws in the strategy and understand a little more about how your particular EA decides upon which trades will be profitable and when to place trades. If you do find errors or flaws then you have the opportunity to hone the process during the back testing stage.
Back testing gives you a great insight into exactly how your intended Forex trading system is going to work. You'll notice quickly whether your system's strategy is accurately selecting currency pairings that would have resulted in profitable trades and if it's choosing pairings well outside your normal risk tolerance levels.
At this stage of your back testing process you can refine the parameters within your system and enhance its performance to suit your own trading strategies. Then run a new set of historical data through your Forex back testing process and see if the new results are more beneficial.
Forex back testing can be a time consuming process, but it's important that you invest that time into making sure you have a Forex trading system that's going to work the way you need it to when it matters most.
When you're collecting your historical data for your Forex back testing try to make sure your data goes back far enough to provide accurate results regardless of what the market is doing. Make sure you include both bull and bear market information so you'll know your back testing results show how your system will fare in good markets and bad.
If you can, try to obtain accurate historical data and not indicative data. The difference can seriously affect your back testing results. When you run your back testing trials, make sure you include a realistic level of slippage. The Forex markets move quickly and can be highly volatile so make sure you incorporate a level of slippage into your data models.
Forex back testing is a vital part of creating, developing and using any Forex trading system and it is a necessary step in building a profitable trading business. Once you've taken the time to understand and fine tune your Forex back testing, it's still important to remember that your results are based on past performance against past market conditions.
No amount of Forex back testing and accurate results against historical data will guarantee your future profits, so be sure you invest wisely and only make carefully calculated trades before jumping in.