Back -Testing Advantages and Techniques

Danielle Franklin

Back-testing via your forex demo account is the way to check whether your trading strategy is successful or not. The general idea behind back-testing is to find an effective strategy that worked well in the past and is most likely to produce the same winning results now.

Back-Testing Advantages

1. Recognition of the patterns that tend to repeat itself within a certain course of time.

2. Deeper understanding of the trading system and more precise decision making during the draw-down period.

3. Estimation of the potential profits and losses based on historical performance data.

Back-Testing Drawbacks

1. Some strategies require a specific spread conditions, meaning that those strategies might not be as effective during live trading compared to demo.

2. Summer and winter time changes may cause the confusion and mismatch price and history figures for specific charts.

3. Trading live means dealing with volatile market prices. Strategies based on order for entries may not work very well in live trading, since the entry prices between demo and live account might differ.

How to Back-Test?

1. Download MetaTrader 4 platform and Expert Advisor from your forex broker.

2. Open MetaTrader 4 platform and click on VIEW.

3. Click on Stategy Tester – a new window will pop up.

4. Choose the Expert Advisor you wish to test.

5. Select the currency pairs (EUR/USD, USD/JPY etc).

6. The field “Model” is the accuracy options. Using every tick is advisable.

7. Check the date box and choose the period of testing – the beginning and the end date.

8. Visual mode will show a chart with the actual trades. The disadvantage of the visual mode option is the significant delay in the back-testing process, therefore you might consider giving it up.

9. Period drop down menu shows the time frame of the chart.

10. At Expert Properties you can choose the initial deposit.

11. At Expert Properties choose the Inputs options. You might want to start with default settings for now and change in needed with time.

12. You are all done – click on start button and see your back- testing in action.

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forex school - Back Testing

|2010-12-02 12:17:57

The funny thing of back testing is that people always have more winners than
losers. But when it comes to live trading environment many of them are always
lose. Why is that?

I guess because of many factors such as mentality of that
trader, the knowledge, the capital and many more. But I use to back test myself
for about 3 years before I opening my first live trading account.

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