Backtesting is a way to look at how a trading plan or idea has been done in the past. A trader can either physically backtest an approach or use backtesting software to determine if it will likely waste time and money.
To directly test a trading plan or model, you have to do a few things. Backtesting needs historical data in trading charts showing how an object’s price has changed.
A trader usually needs data from the last few weeks to backtest a short-term trading plan. Data from the past is often needed when making plans for the future.
Easy steps you can take to backtest a trading strategy
- First, figure out how far the plan can go. Backtesting is like training, but you don’t have to risk any of your own money.
- Please choose which financial market and chart timeframe will be used to test the approach further. Consider whether you would rather look at several markets at once or focus on one stock or currency pair.
- How long you gather information over is also important. It can be one week, one month, one year, or even ten years.The different choices will give you different kinds of knowledge and experiences.
- Third, try to reach a deal. You can go back in time and look at sales from last year, month, or even last week.
- Reviewing price charts can help you decide if it’s a good time to buy or sell. This can be done repeatedly until every trade on the chart up to the present has been found and written down.
- To determine how much money you made overall, write down and add all your trades. All transactions, whether good or not, should be written down here.
- In step seven, you subtract all of your selling costs and commissions from your total sales to figure out your real earnings. The net return is the amount of money made or lost at the end of the period.
- Always get a set percentage of what you put in. Compare the amount you’ll need to spend in each deal to determine the risk vs. reward.
Can it be used on the forex market?
Manual backtesting is done in the FX market as in other markets. Since the foreign exchange market is always open, you should only do a backtest when you can trade.
Without automation, a month-long, round-the-clock backtest of a forex approach will not likely give reliable results.
Technical signs are useful for testing the past because they give exact information at a given time.
Bottom line
Even with these things in mind, backtesting is still the best way to create a risk-free, profitable trading plan.
Backtesting through a demo account will work completely differently using real money. Emotions will be high, and you will probably miss a few trades or might enter unsuccessful ones.
