The Importance of Back Testing a Forex Strategy
I decided to write this post after receiving an email from one of my student as I want to emphasize the importance of back testing a strategy before you use it in trading.
There are too many marketers out there in the market who are posing as traders trying to sell us courses and services that do not work. Therefore back testing a strategy is one of best way for a trader to be sure that they have learned a reliable strategy that really work.
I have received emails after emails from readers telling me how much money they have lost using those strategies that they learned from those youtube videos or those forex robots in the market.
Therefore my only advice for you guys is to always do back testing for any forex strategy before you use them.
For those of you who are new, you may not know how to go about doing it and that is why I am writing this post now to help you.
No matter what strategy you learn, you must always make it a point to back test it or trade it on a demo to see if it is effective before you trade live. Even for strategies that you learn from my Forex Street University course, I will still ask you to do a back testing or trade on a demo before you trade live.
The only person you can trust is yourself and no one else as you are the only person who is concerned about your own money.
Below is an email I have received from from my student who inspire me to write this post for you guys
(Disclaimer: Results may vary with each individual)
Below is the steps to do back testing of a strategy
Step 1: Move back the chart to at least 3 months ago
Step 2: Plot all the necessary forex indicators as needed by the strategy you are back testing
Step 3: As you scroll the chart from left to right, keep a lookout for a trading opportunity according to the strategy
Step 4: Once you identify it, note the time and date on a note back and then check if the trade is a winning or losing trade
Step 5: Consolidate all the results for the 3 months and you will be able to know how many winning and losing trades it makes. You will also be able to consolidate the total profits made.
If the strategy makes you profits every single month without fail, it is consider a good forex strategy.
If the strategy did not make you profits every single month but it makes you profits as a total of 3 months, you will need to extend the back test to 6 months period.
Alternatively, I will suggest that you trade the strategy on a demo for another 3 months to see if it is still profitable at the end of another 3 months.
Most new traders want to do things the simple way and that is why they tend to lose a lot of money in the end.
For those of you who find that back testing is very troublesome, I will suggest that you trade on a demo for at least 2 to 3 months. If you are able to produce at least 2 consecutive months of profits, then you can trade live with that strategy. This is what I ask all my students to do before they trade live with my strategy.
For those of you who are new, you can take a look at my blog post below