Hi Everyone. I am almost finished with the Babypips school and I have begun to do one of the things recommended, which is to back test. I am just getting my feet wet using charts on MetaTrader 4, and I am trying to get a feel for backtesting the system that was put forth in the school. I have two questions.
My first question is: what is the best way to do this [U]and keep track of the results. [/U]I picked an arbitrary date several months ago on a Eur/Usd chart where the indicators all lined up and so I’m inching forward in time on the chart to see how the system would have played out had I been there to enter the market. So far so good. But, as I work forward, I undoubtedly will see times when the system was a hit, and when it was not. Should I be creating some sort of a spread sheet and keep a tally of wins and losses to evaluate the system when I am done with the backtesting. How do you all objectively evaluate the effectivity of a system after spending time working through the candlesticks?
My second question is: on the baby pips simple system, daily charts are used, and it says to never risk more than 30 pips. Does that mean that when the indicators line up to enter a trade (for evaluation purposes and backtesting of course) that you trail a stop at 30 pips below (on a long) your entry point??? How else would you limit your exposure to 30 pips?
Yes, you should definitely create a spreadsheet to track your trades. You will want to do this for live trades, anyway, so why not do it now for backtesting. You can also use it when you demo.
“Come Into My Trading Room” by Dr. Alexander Elder has an example of a spreadsheet that you can use.
Yes, risking 30 pips would mean setting your Stop Loss at 30 pips past your entry point.
However, keep in mind that 30 pips is only an example. It depends on which currency pair you’re trading and what timeframe you’re trading on.
On a daily timeframe, 30 pips would pretty much get you stopped out of most currency pairs, especially the volatile ones like GBP/JPY. Take a quick look at a daily chart for any pair and you’ll see that most of them move way more than 30 pips in a day. So, it’s only a guideline, not set in stone.