Hi there!
Can someone explain what is back testing and what is it good for?
Thank you!
if you have in your possession a “trading bot” which is simply a computer program that automatically opens and closes your trades, you can then run what is called a “backtest”, which means that you will run a “simulated trading session” using “past pricing data”…
you can run a simulated trading session over some period of the past, perhaps six months or one year or five years or even more…
now here is the kicker…
backtesting is a mathematical delusion, even if your backtest produces the most spectacular profit result, THIS DOES NOT MEAN THAT USING THAT PROGRAM TO TRADE LIVE AND IN REALTIME THAT IT WILL PRODUCE PROFIT.
backtesting is similar to fools gold.
fyi, companies or individuals that SELL trading bots like to use a backtest equity curve to razzle dazzle newbie traders, because it fools newbies into buying their bots.
Hmm, a bit confusing but thanks anyway.
ok, i will try again…
IF you had in your possession a “trading bot” and you started wondering how it would have performed over the previous year or five years, you would run a simulation using past pricing data…
thats a backtest.
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Ok, I get it now. So, they just do it to see whether it’s profitable or not? and when they are using past data, how that can be trusted for live time trading?
nope. you cant.
do you see that fantastic looking equity curve that i posted above? even if your backtest produces a super fantastic equity curve result like that, IT IS ABSOLUTELY ABSOLUTELY ABSOLUTELY NO INDICATION THAT YOU WILL PERFORM WELL IN LIVE TRADING.
IT IS B.S.
i can tell you what backtesting DOES DO and that is to test that your trading functions are working properly or not.
if your bot is not opening and closing trades, if it is not setting your takeprofits and stoplosses properly, it will probably become obvious during that backtest.
just fyi, back when i began this project i actually backtested my custom bot code that would turn $10k into $50 billion in a couple of years.
it is nonsense.
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Yeah, I get it. Sounds rational but why all people are obsessed with back testing?
they believe in the backtest results for a couple of reasons…
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they simpy dont know that it is nonsense.
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they are dreaming.
backtests have seduced and charmed many newbies into thinking they are gonna win big.
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Yeah, I heard a lot from some people that my back test showed this, my back test showed that.
So, basically it\s just a delusion?
again, they are either ignorant(not stupid, just that they dont know) and/or they want to believe.
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let me guess… they were willing to sell you a copy of that bot… just cuz they like you…
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Well not really 
if someone showed to you their backtest, they either wanted to sell to you a copy of that bot OR they wanted to get your reaction and your validation because they are nervous to believe that it is really real.
either way, it dont mean nothing.
best wishes.
Thanks for the explanation. Good luck!
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While there is no guarantee, FX pairs, especially the majors, do follow chart patterns which pro traders use to seek opportunities arising. In which case, backtesting could be useful in identifying repeat patterns - and then what happens next to the price movement. It is a possible edge that should not be ignored.
I use these patterns, e.g. support and resistance zones as to where to place my T/P before losing traders close their trades or get stopped out. My strategy provides for up to a 71% winning trade outcome.
What is not predictable is what the market is doing and reacting to at any one time. Most of my losing trend trades are caused by being spiked out by one candle movement on the 4hr chart, which is particularly annoying.
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Hello Eaten,
It’s always important to listen to both sides of the story. While Babygogo may be a non-believer of backtesting, it’s essential to hear out the believers too. Ultimately, it’s up to you to discern and choose your path wisely.
Backtesting forms the basis of technical analysis and is the backbone of any trading strategy. The core structure that allows you to erect properly. The underlying assumption of backtesting is that history repeats itself, but sometimes it doesn’t. For instance, if you collect data during a trending phase of the market, your strategy may only work during those times. Similarly, if your strategy was devised during a ranging period, it may only work during sideways markets. The challenge for us traders is that we never know when a trend will end or start. We usually only start to get a feel for it when our performance starts to drop. This is where money management rules come into the picture.
In short, it’s essential to squeeze every drop of blood out of the market when times are good and cultivate patience when times are bad.
Pacman EATS
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Well for starters back testing does not form the basis of technical analysis but instead calculating the proper Target of your currency is the basis of technical analysis.
100%.
History does not repeat itself and there are no patterns in the charts that create a predictable move.
100%.
Knowing what the market is going to do right now is exactly what is predictable instead of being the one thing that’s not predictable as you said.
Moving averages are a memory of the past and they do not predict the future.
Pretty much all of the basic indicators are based on moving averages.
You will never predict a trend or a trade using a moving average.
Happy trading.
Some Youtube channels do little else except run back-tests on various strategies.
Sometimes they prove that technical traders’ logic is wrong. Logic says that a TA-based profitable strategy should be profitable on all forex pairs and in all time-frames. Back-testing proves this is not true and selecting the wrong pair or the wrong time-frame can make a god strategy a loser. Therefore, definitely back-test your strategy, but do not assume that because it works on EUR/USD D1 it will work on EUR/USD 30m (or maybe on USD/JPY on any time-frame).
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i studied the psychology of traders.
One that is so good its divine…