Everything you need to know about backtesting

What you need to know before you define your trading strategy.

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'Thanks, Paul, your videos on Backtesting are great' Amy, Bristol

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'Thanks, Paul, your videos on Backtesting are great' Amy, Bristol

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What is backtesting on Forex?

In technical analysis, backtestingis described as an act of simulating the process of trading whilst using a set of rules over previous price data, to see how much money would have been made or lost if a trader had followed the same strategy

For Forex traders, backtesting evaluates the effectiveness of a trading strategy and gives traders the confidence to stick to it at times when their strategy doesn't appear to be working (whilst others doubt their strategy, especially during a drawdown).

quote iconIf you are not backtesting, you are hunting in the dark.

Why is it important to back-test your strategy?

Did you know that 78% percent out of all traders don't backtest?

And did you know that this is one of the main reasons why 78% of the traders fail?

With that being said, calling backtesting anything less than important would be an understatement.

Backtesting is absolutely CRUCIAL for your long-term trading success. It is only through backtesting, one can learn the ins and outs of their strategy and find out which strategies are profitable and eliminate those doomed to fail. And at the end of the day, nobody wants to be chasing shadows in the market.

Why is it important to back-test your strategy?

Did you know that 78% percent out of all traders don't backtest?

And did you know that this is one of the main reasons why 78% of the traders fail?

With that being said, calling backtesting anything less than important would be an understatement.

Backtesting is absolutely CRUCIAL for your long-term trading success. It is only through backtesting, one can learn the ins and outs of their strategy and find out which strategies are profitable and eliminate those doomed to fail. And at the end of the day, nobody wants to be chasing shadows in the market.

Step 1

Backtesting with forex tester 5

Start with defining the currency pair, the timeframe and the time period you want to use. We have attached a screenshot for you to see what it looks like.

forexsignals.com brokers panel
install mt4
Step 2

Access previous data

You will get access to your previous data with the option to download them.

Step 3

Add your Indicators

Next up, add your indicators. All you need to do is select "Add Indicator" and choose the ones you use for your trading.

creating mt4 account
MT4 deposits
Step 4

Start testing

Lastly, select the right timeframes and click "Start Test". All historical data will play back on your screen.

You can pause, rewind and fast forward to reach a point where your strategy would indicate a trade. Once done, enter a dummy trade with stop loss and take profit levels.

Step 5

Get synopsis of the results

After the test is completed, forex tester 5 will give you a synopsis of the results. It will look similar to this.

It will also provide you with a detailed breakdown with the option to paste it into your own spreadsheet.

synopsis mt4

Top 5 golden rules for back-testing

DO NOT cheat. The test works to tell you whether something works or not. It is not there to prove your strategy is bullet-proof.DO define your strategy as tightly as you can.DO NOT take one test as gospel truth. It takes a couple to get it right!DO take your time with the analysis. There is no rush!DO NOT be afraid to change the strategy and start again from the beginning. Even the best traders don't get it right the first time!
golden rules Forex

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