Backtesting is a process of testing your trading strategy predicated on historical price data. Successful Forex traders employ backtesting to learn how their trading strategy performs over time.
Backtesting is popular among traders because it tells them if their trading strategy has a chance for success without risking real capital. If you backtest your trading strategy and get positive results, it will also raise your confidence when you start live trading, giving you advantage over traders that have doubts about their trading strategies.
However, backtesting is meaningless without a solid trading plan so make sure you have one before you do this.
Backtesting a Trading Strategy in Trading Platforms
Let’s explore how you can backtest your trading strategy even if you don’t have any coding knowledge. This can be done in free electronic trading platforms such as TradingView and MetaTrader 4.
In order to backtest your strategy in a trading platform, you have to hide the future data and go over the chart by looking at each bar and trade the market in an objective manner, just as if it was live trading.
Assuming you’re using MT4 or TradingView, here’s how you can backtest your strategy:
- Choose the market you wish to backtest and go back to the earliest period.
- Put all the required trading tools and indicators on the chart.
- Check if there’s any setup on your chart.
- In case there’s a setup, mark your entry, stop loss and profit target and save the results of the trade.
- If there’s no setup, press F12 and move forward through the chart bar by bar.
- Do steps 3 and 5 again.
If you don’t want to backtest your trading strategy manually, you can use a paid backtesting service such as Forex Tester that holds some advantages over manual backtesting.
Forward Testing a Trading Strategy
Opposite to backtesting, forward testing refers to testing the performance of your trading strategy in real-time, rather than historical data. The process is quite similar to backtesting as the only major difference is that you’re doing it in real-time.
Follow the steps below to forward test your trading strategy:
- Plot the trading instruments and indicators on the chart.
- Look for your trading setups in the live market.
- Once you spot a setup, record the results of the trade.
- Repeat the process until you reach 100 trades.
When doing this, here are some key metrics that you want to record – Date, Time Frame, Setup, Long/Short, Market, Tick Value, Price in/Price Out, Lot size, Stop Loss.
In a nutshell, backtesting is a helpful process that will let you know how your trading strategy does without risking real capital. It can be performed manually in trading platforms like MT4 and TradingView without programming knowledge, or via a paid backtesting software such as Forex Tester.
On the other hand, you can also forward test your trading strategy which unlike backtesting, which is based on historical price data, refers to testing your trading strategy in real-time.
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