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What is backtesting and why do you need to backtest your Forex Trading Software?

This video explores the important concept of backtesting your Forex trading system and how backtesting can be used to improve your trading results.  In a nutshell, backtesting is essential because it:

• Provides statistical evidence that the trading rules you have chosen are profitable and tradable
• Gives you the confidence required to trade the system in real-time.
• Lets you “LOCK-IN” the trading rules in every fiber of your being, so that you completely understand the rules and are able to implement them in real-time without stress, panic or confusion.
• Lastly, it lets you as a trader find possible methods of optimizing or improving on your trading rules.
  For instance, you might complete your backtesting and then SEE from the data that:
  • trading during the 8 major FOMC news events is NOT lucrative
  • trading the New York afternoon sessions is NOT worth it

What does “statistically valid” mean in backtesting?

When you backtest it is important to get enough data (called ‘sample size’) to make the testing statistically valid.   The more data that you collect, the smaller the “margin of error” is likely to be, as outlined in the table below.  Usually a sample of 100 trades per market / time frame should be sufficient; however, if you have the time and your trading system generates enough trades, then it is worth the effort to collect more data (200 trades is plenty).

How do you collect the data?

1. The first step is to open the chart you would like to backtest and make sure your chart is set up so that it displays the desired number of trades in the chart.
2. Scroll back to the beginning of the chart, AND  if you have the ability to “playback” the data as if it were happening in real-time (like in eSignal), then use this feature–it is exceptionally valuable in helping you lock in the rules and participate as if you were trading in real-time.
3. Find the first trade setup that follows your rules and record the information you collect in a spreadsheet.  Typical information that you might collect is as follows:
   Date
   Time of Entry
   Entry Price
   Signal Type (i.e. Blue dot, Red dot etc)
   Whether you bought or sold (Buy/Sell)
   Stop placement
   Stop size
   Market (i.e.   EURJPY, CHF etc)
   Method of Exit (i.e.  Stopped   or  EMA3/14 crossover  or  Trailing Stop  or Stopped Out)
   Exit Price
   Pips
   Profit / Loss
   % Change (compared with Account size)
   Growth in the account
4. Continue forward throught the charts, recording each trade while paying strict attention to the time of day. If you are a day trader make sure that you only record trades that fall inside your trading window. The whole point of the backtesting is to make it realistic and statistically viable.

What do you do after you have collected the data?

1. Look at the total growth in the account and graph it. Equity curves allow you to visually see the growth and inevitable drawdowns in the account.



2. Filter the data to see if you can improve on the profitability of the model. Spreadsheet programs let you add “filters” which allows you to narrow down the data that is displayed by simply checking or unchecking selection boxes as shown below.

What do you do after you have collected, analyzed, and filtered your data?

1. Take the time to “forward-test” your trading system. This means that you “paper-trade” or “virtual trade” your system in real time for 1-2 weeks to make sure you know how to place orders in your trading platform, and to watch the results in real-time.
2. Apply MONEY MANAGEMENT techniques to your data and ACCELERATE your trading results! Money Management refers to the process of mathematically accelerating your trading based on your results… This is CRITICAL to your success as a trader.

You will receive Money Management tools and training when you purchase the Forex Model, along with Backtesting assistance, and two MONTHS of live support.   So, not only do you receive a consistent and profitable trading system, but you also get the necessary tools and support to IMPLEMENT the system in the markets day in and day out.

Check it out:  www.4xauthority.com
To your success!

Alexander
4xAuthority.com