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Beginner Tips on How to Back Test Forex

Financial market participants started wondering about how to back test Forex trading strategies starting back in 1980. That was the time when the first backtesting methods appeared. They used to be straightforward and time-consuming. They required deep knowledge and understanding of how the financial market acts.

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Today, the process has become easier thanks to online and electronic concepts. Traders no longer have to spend months to test their techniques under real-market conditions. What’s more, advanced software makes it possible to benefit from automated testing without the risk of losing the trader’s funds.

On the other hand, relying mainly on computer powers and advanced technologies will be a crucial mistake. The key to success is to combine up-to-date software with human logic and already obtained trading experience. In this guide, we will review the core steps of how to backtest a forex trading strategy

What Does Backtesting Forex Mean?

When we say backtesting Forex trading strategies, we generally mean utilizing historical data to predict how the given strategy will perform under the same market condition. In other words, the concept considers using a set of fundamental rules, technical issues, historical price data, and analysis to see what results a particular strategy will generate within a given timeframe.

Why Is It Necessary to Know How to Back Test Forex?

The knowledge provides additional benefits for traders. The key advantages are as follows:

  • Concept insights: you have a full overview of the strategy you use. It is possible to predict the outcome and returns.
  • Practice skills: when backtesting Forex trading strategies, you develop crucial technical analysis skills with a chance to identify the most favorable trading opportunities while tracking the past price action.
  • Trading confidence: with more experience you gain, you will be able to perform every new trade with confidence. It is very important before opening a Live account and trading for real.

With all these factors in mind, beginner traders will get a perfect chance to make their strategies successful as possible.

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How Does Backtesting Forex Work?

As you already know, the concept utilizes past price data to reconstruct the trade taking into account current market conditions. Users may select from a wide range of backtesting software. It may have different types and methodologies. Depending on the soft type, traders will benefit from an array of technical indicators:

  • ROE – expected total returns on equity.
  • P/L – the total amount of profits and potential losses.
  • Loss Ratio and Total Gain – it helps to identify the number of successful and failed trades.
  • Volatility – helps to identify the market condition and environment along with downtrends and uptrends.
  • Risk Adjustment Returns – it helps to calculate potential returns in reference to the strategy risks involved.

With supreme backtesting, you will benefit from all necessary market and strategy insights that will let you evaluate the potential performance.

How to Backtest a Forex Trading Strategy

Traders will have a wide selection of different software to backtest a Forex strategy. Each soft type comes with its custom evaluation methodology and algorithms. However, the two major categories include a Demo account and Manual back testing.

Trading with a Free Demo Account

It is the easiest way to test any strategy despite the complexity of trading style you prefer. The key benefit here is that you do not have to put your own funds at risk. A broker will load your balance with virtual cash to let you trade under real-market conditions with full access to MT4, technical indicators, and other resources.

Manual Backtesting

This option is more time-consuming. What’s more, it requires deeper involvement and financial knowledge. The process itself is pretty simple. All you need is to generate historical price data and adapt it to a particular chart pattern checking each and every bar to identify the price action within a given timeframe. The key advantages are as follows:

  1. Works for both newbies and pros.
  2. Deep understanding of how the Forex market and software work.
  3. The manual approach helps to test real-life trading conditions and mechanisms as well as spot the best market entry and exit points.

It is a good way to pick up essential technical analysis skills. You will see how the software and indicators work with your own eyes. It will develop good financial and trading skills letting you grow from a newbie to a real Forex pro. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.