Backtesting is a trading strategy based on historical forex data. It plays a vital role in determining whether a strategy works or not. In backtesting trading strategy, instead of working in the future period, a trader can simulate on the past data in order to measure its effectiveness. It is very popular strategy amongst traders because of its easy and straightforward approach. Traders who apply this technique believe that past performance is indicative of future results.
Backtesting strategy is used to test the technical analysis of various strategies to be applied in forex. By using backtesting a trader can test the workability of a given strategy and can thus check whether similar results would have been achieved as achieved in the past. Once you have the past results and results achieved after backtesting, you can compare and determine whether the strategy has predictive value or not. It is very common among technical traders and most of the trading is done on computers. The digitalization era has made the task easier and less complicated.
Backtesting trading strategies builds up the confidence among traders about the success of the designed strategy before implementing in the current market scenario. It is based on the notion that if a strategy has proven itself right in the past then it will work successfully in the future as well and vice versa. Nearly anything can be back tested, so backtesting has wide spread usage possibilities.
There are few key points, which should be considered before starting with the process of backtesting.