Find the reasons how backtesting became the only reasonable way to trade smart.
Intrigued? Keep reading and learn more.
What does make the difference between a lucky guess and a profound trading? Are you sure, your trading style is more than just flipping a coin and expecting the positive outcome?
Or probably you are overwhelmed by the quantity of the trading strategies on the Internet promising to bring a fortune? Want to know how to avoid a desperate confusion when the “simple” strategies only drain your live trading account?
The same here.
Read the article below and check how it is easy to confirm or disprove any trading theory with the power of backtesting and elementary school math.
With this article, we open the series of the backtesting experiments with the one aim – to show traders (both beginners and professionals) that you shouldn’t take anything on trust especially if you risk the real money and you should double check ANY information found on Internet related to trading.
We are not going to teach you the importance of the technical analysis, but the math calculations speak for themselves.
In two words, backtesting is a very simple process:
Quite simple, right?
You will totally agree:
It would be easy to perform a simple backtesting as depicted above. Nevertheless, to get deeper into the topic we decided to include some math to make the results of the experiment more illustrative.
No boring math, don’t be afraid.
What is the reason behind of such complex approach?
The following calculations help to save your precious time and efforts and bring up the entire backtesting process to the new, more precise level.
How to ensure the strategy really works under the pressure of the various market conditions? We solve this issue easily with the idea of the Training Set and Forward testing.
In order to increase efficiency within the short period of the historical data, we perform 6 separate experiments and compare the results.
The entire process will take 5 STEPS:
Disclaimer: it is not possible to test all the variations of the strategies, theories and trading ideas – there are tons of them. If you have not found the strategy you are currently interested in among the ones we have backtested, feel free to backtest it yourself and share your opinion with us.
Moreover, we cannot guarantee the ideal performance of the strategy during the live trading even if it turned out to be profitable during the backtesting.
The backtesting gives you the statistically proven confidence in your trading decisions to some extent. However, we sincerely believe that without it trading becomes a synonym of the gambling or a lucky shot in the dark.
Please, keep in mind that you use the backtested strategy on a live trading account at your own risk.
You might be wondering:
If the backtesting experiment shows the pessimistic results, should it be the reason to discard the trading strategy and search for the new one?
For this experimental backtesting we pick the trading strategies with commonly used indicators, default settings, and suitable timeframes. However, as a trader, you understand that the variety of the settings, indicators, timeframes, currency pairs give you the endless opportunities to perform experiments.
What particularly can be a matter of the additional change and backtesting within the strategies?
Very important: during the backtesting sessions, we set the spread meaning to 1 point. Please, check yours because spread matters – the larger it is, the bigger amounts of profits you should have in order to cover the difference.
The only reasonable way to learn the odds to earn the money using ANY trading plan – to put it to the test.
So we did this.
What is the way to compare the results of the Training set and the Forward Testing?
The main idea is that performing successfully during the 50 trades of the given period of the Bull market, for example, the strategy normally will show mostly identical results during the Forward testing.
As for calculations, we receive the Training Set results by dividing the profitable trades by the whole number of trades. The same way we receive the results for the Forward testing.
For the satisfying results, the numbers we receive should match more or less. Besides, we are going to check the periods – any professional trader wants to recoup his investments within the shorter period.
We are happy to introduce a series of articles about backtesting the strategies with the most widely used indicators and their combinations – no custom or newly invented indicators or systems, but the old school only – theories that gained love and respect from thousands of traders.
Read and check how we examine Bollinger Bands and MACD, Stochastic and RSI and others with the superpower of backtesting.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester 3 for free.
In addition, you will receive 16 years of free historical data (easily downloadable straight from the software).