Most traders trade without backtesting a strategy. That’s is the biggest mistake of a retail trader. Even if you learned a strategy from our website, you need to backtest that strategy before trading on a real account. If you have learned something, open the chart scroll left, and backtest forex strategy to know either it will work or not.
So backtesting a strategy is the most important step before trading a real account.
What is backtesting in forex
Backtesting is a technique used to test the performance of a trading strategy on demo data.
- Backtesting predicts the future performance of a forex trading strategy.
- It helps us to improve a strategy like either to increase risk-reward or increase stop loss level etc.
- Optimum parameters for a trade setup can be found out using backtesting
I will discuss free and effective methods to backtest forex trading strategy using tradingview. There are many other paid methods too like using a forex tester 3 tool and many more but analyzing all the trade setups visually after backtesting is very important.
In the first attempt to backtest a strategy, most traders will face a failure. then we will analyze and will add confluences to optimize it. We will figure out the weak points of strategy and drawdown. In the second attempt, a few traders will succeed.
Remember: To trade a trillion-dollar market is not easy, it will be easy but after a lot of hard work
how to backtest a trading strategy
Now let’s start testing a trading strategy.
- Create a folder in your laptop/pc and name it EURUSD Backtesting (Pair name). we will have to backtest all 32 pairs.
- Create an Excel file. In the excel file, we will write down the trades (Profit, loss, breakeven) here later. Because excel will provide us a graphical explanation of the given data. So, it will be easy for us to figure outperformance.
- Remember to use fix percentage of the balance on every trade (2% recommended). Don’t calculate pips. Calculate profit and loss on every trade.
- Go to the tradingview.com website and create an account if you don’t have to save your progress automatically. We are going to use tradingview reply feature.
- Open EURUSD Chart and use reply feature and Scroll left until tradingview stopped providing historical data.
- Now keep the chart moving forward by pressing the F12 key or Left Arrow key until you get a trading setup. It will progress candle by candle. Zoom in or zoom out the chart appropriately.
- Take a screenshot of every setup you found out during testing and move all the screenshots into the created folder.
- The number of screenshots must be at least 75 or 100 to analyze data properly. Save screenshots in a series of numbers and write down those numbers in an excel file. 100 samples to collect is the answer of how far to backtest forex strategy. for example in the image below
Use of excel in backtesting strategy
Now open the excel file. At this point, it does not matter either you are in loss or in profit (if profit then well & good), Check overall results (profitability and loss ratio and use conditional formatting to check drawdown (consecutive losing trades) this is the most important to check.
Using conditional formatting in excel, you will come to know about consecutive losing trades during backtesting. Now open the folder and open the corresponding screenshots by using the screenshot number. Analyze all the consecutive losing trades and add a confluence to filter these losing trades as much as possible.
Repeat the above step for all the losing trades
In the end, check all the 100 samples again (after the addition of appropriate confluence) to confirm that the addition of confluence is not affecting the winning trades.
After optimizing the strategy and testing successfully on single pair, now it’s time to test on other forex pairs, collect data and optimize the strategy.
After successful backtesting, you are now ready to trade a live forex account. Keep a record of all the trades as a trading journal and analyze your trades after every 3 to 6 months to keep on optimizing and rectifying your mistakes.
This method is not easy but it will work and invest your time in trading daily.