How Important is Back-Testing really?? I read this form School Of Pipsology “There is no such thing as a consistent market. Conditions are changing all the time. The past has little effect on the future in a changing market.” what’s the point of back-testing if the results might be completely different when you apply it on the current market?
backtest as much as you can, patterns repeat themselves everyday, sooo it won’t hurt to go back in the past to identify them in order to help you place your future trades? lol
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Back testing will build YOUR confidence in YOUR system. You will learn the ins and outs of YOUR strategy. This is so important for being profitable especially from a pyschological standpoint as it will help you weather losing streaks.
Market conditions are constantly changing, yes. They may be trending, they may be ranging, they may just be moving sideways. You need to know in what conditions your system performs best. And trade under those conditions.
Best of luck to you and get to back testing!
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“he world economy is returning to growth, confidence has picked up and, over the last six months or so, financial market conditions have …”. This is an article from the reserve bank of Australia october during 2009.
At the core, its supply and demand, interest rates, inflation, “risk appetite”,. The terminology from the youtube documentary is “feeling the market”.
Past performance is not indicative of future results!
Sure, past performance doesn’t indicate future result.
But, just my two cents, backtest is the first filter to know whether a strategy worth your time and money or not to be forward tested.
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Back testing is a waste of time. Just forward test only.
On the contrary, a correct backtesting will save your time to pick some strategies among so many strategies offered before you forward test it.
Why do you think a company need a track record before they employ someone?
Of course, backtest itself it’s not enough, you always need forward test
To my mind, backtesting is very important. For some reasons it is undervalued by traders, but still very efficient. Many traders can say that past performance has no effect on future, but everthing in our life build on past performance.
Of course, it is almost impossible to backtest strategies based on fundamentals, and it is quite difficult to backtest strategies based on price action, but it is possible to backtest most of the indicators-based strategies.
Look at the 50 years old charts - you can easily find the same technical patterns and models. Trendlines, triangles - all these works great. So, as most of the traders use technical analysis, backtesting could be useful for them.
The main advantage of backtesting is the possibility to check the performance of the strategy withou time-consuming demo testing.
There are many different approaches to backtesting. First one is to create your own algorithm (as usual, Python-based) and use it for backtesting. In such case you will need to find and download historical data, and you need to have a deep undersanding of coding as well. Another way will be to use special software for automated backtesting (the most popular nowadays is Forex Tester). Such software has built-in download manager to operate with historical data provided by the broker and also many useful features like multiple timframe testing.
As the result of backtestings, trader will get detailed information on the performance of the strategy, including data on drawdowns, winners and losers and other criteria that would be useful for improvement.
Another important point is that backtesting gives possibility to change details one by one and conduct testing may times to see the difference. The main idea is that you can try different strategies on the same situations, that makes the results of such testing much more accurate than in case of demo testing when the situation changes each time.
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Back testing ensures that your indicator is effective in all types of scenarios. I utilise this in all my forex testing regime.
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Backtest is just a part in developing a profitable trading strategy. With back-testing you may check how your strategy works under different conditions. Such an analysis helps you eliminate unwanted operations or vice versa may give you an idea of a good indicator. Imagine, we have an uprising longterm market for the EURUSD pair. Whatever you do, a long position will most likely be closed with a profit. But if you did not make any back test, you will get huge losses once the trend changes and becomes a flat or a short one. Having tested on a down market, you could have saved a lot.
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Thank you for your reply. But how can you properly back-test things like Fib levels retracements, pennants, different candlestick patterns, R/S and fundamentals. I mean what if you want to enter and exit the market using a combination of these. lets say for example, fib level and resistance/support or resistance and bearish candlestick pattern. How would you back-test that ?? I’m a newbie and my question might sound stupid, I just want to understand lol .
thank you
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I understand. This will be time consuming and take a lot of effort. I will try to explain for you and hope it helps.
First, open the chart of a currency pair you wish to backtest your strategy on and scroll back to a previous period. Most charting platforms allow you to simply drag to change the date on the chart. ** Make sure that all indicators and other tools that make up your strategy are applied to the chart.
Second, Move the chart to spot possible trade setups.
** You are going to have to know why you are placing a fib level is it at swing low or swing high and identify whatever candlestick “patterns” you are looking for. I recommend you place your support and resistance on the time periods you will be testing before anything else.
Side note I personally believe candle stick patterns are BS and I read raw, vanilla price action. I let the candles speak for themselves if they are getting close to a support or resistance level and the momentum of candles is slowing I look to enter. I also have never used fib levels or any indicator other than RSI on occasion. If RSI is showing overbought or oversold and hitting a Support or Resistance level I have found through journaling that those trades do produce a higher win rate for me.
Third, You now have a trade setup based on your trading strategy, you will need to write down the results of the imaginary trade you just took. Write down where you enter, the date, the entry point, the stop-loss, the take-profit, the reward-to-risk ratio or any other information that is important to you.
Fourth, repeat the process until you find a trade setup again, and start over on the third step.
Rinse, lather, repeat.
This will be time consuming and will require hours of work but it is a very important step before you begin trading your strategy live.
And for those hours invested you soon may be able to be your own boss and answer to no one. I got out of a real crappy gig by learning to trade and eventually getting on with a prop firm and trading with them until I built up a sizeable amount of capital and reputation.
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Thank you so much. God bless! I will definitely be backtesting
Hi,
May I ask what platforms I could use for backtesting?
Do any of them offer free backtesting?
Thanks