What Are the Odds to Find Profitable Forex Strategy on the Internet?

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.

What is the main idea behind the backtesting?

In two words, backtesting is a very simple process:

  • you find a strategy claimed to be profitable (or come up with your own one);
  • test it through the 10 years of historical data – being profitable in the past, it will definitely increase chances of the gaining profits during the live trading.

Quite simple, right?

5-Steps Plan to Score the Best Results While Backtesting Strategies

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:

  1. We define periods of the market when it was mainly Bullish, Bearish and Flat.
    As for the Bull market, we take the period from 14/02/2011 to 25/04/2011.
    The Bear market refers to 18/08/2014-19/01/2015.
    The Flat market continued from 15/08/2016 until 03/10/2016.
  2. We test the chosen strategy within the conditions of the Bull market and enter 50 trades – this is how we form the Training Set; next, we perform the same backtesting for the Bear and Flat markets within the range of the dates above (again 50 trades at each);
  3. In order to perform Forward Testing we define more periods of the same 3 markets:
    Bull market – 09/06/2010-01/11/2010
    Bear – 01/09/2011-16/07/2012
    Flat – 04/05/2015-12/10/2015
  4. Then we enter the 20 trades at each of the markets creating this way the Forward Testing set.
  5. The last, but the most important step – with a sense of accomplishment we compare the results and make the conclusions.

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.

How to Adjust Settings and Compare Results

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?

  • Stop loss and take profit –you can try to change them accordingly, increase or decline, they can have the equal meaning or the riskiest ones can try to backtest the strategy without Stop Loss and Take Profit and close trades manually based on the signals from the indicators (however, we strongly do not recommend you doing this);
  • We use the default setting of indicators, however, you can backtest the custom settings – you never know what can work the best for you;
  • Timeframe and the currency pair – try this strategy for scalping or the day trading;
  • The entry points of the trade;
  • Probably you can combine two indicators listed in our article with the third one you trust even more precise entry points.

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.

How to Read the Results?

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.

From Theory to Practice

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.

Try It Yourself

Trading psychology is one of the essential pillars of the Forex success, so even if you are an experienced trader, you shouldn’t dismiss a trading psychology advice.

Do you need a comfortable space in order to take control over your emotions and get prepared to the live trading?

Simply download Forex Tester for free. In addition, you will receive 22 years of free historical data (easily downloadable straight from the software).

Grow your patience, boost your trading skills, learn to avoid psychological traps without drawing your live account.

Share your personal experience of success in Forex. Was this article useful for you? It is important for us to know your opinion, share it in the comments below!

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