How to Make a Back Testing

Would you like to be a constant loser and shred your bills easier way? If your answer is NO (I hope so, although there are many who love to lose money), then I invite you in the next 5 minutes internalize the importance of using the weapon Backtesting as fundamental to your success operating in forex and how to make the most of the information that this tool provides. 

Make a Backtesting is only picking up a set of data (events) and submit them to the strategy (trading system) that we are trying to test to measure their efficiency. 

Here the key question is: If the vast majority of knowledgeable Forex fundamentally agree to perform the Backtesting, why despite the warnings, novice traders and not so newbies do not use it as is? 

Here I may have two answers: the first is that many find hard to do. 

I would say they get tired, they are bored, annoyed them, do not understand or just do not feel like it and prefer to operate their strategy launched in the demos (like trade with money but no money), and even the real ones. Big mistake, in the end those people will always be losers constant. Always. Why? I would say that greed, impatience and even the easy way that can have many people in their minds and their way of understanding life and makes venturing into "blind" to the market. Then, when they flew their first accounts are frustrations. 

Then there is another group that if it does. I've seen many novice traders (and many who have years and running), but do not know. Conclusion, they have good intentions, but good intentions do not generate pips, so we also become part of the great mass of losers. 

Both groups of traders lose in part because this business is too individualist (when operating you may have no one on the side that tell you to do and above all "don'ts") then the mistakes and brutalities that one can make are the order of the day, one more reason why so many operators fail. Perhaps with enough guidance when using the demos and then the real (I'm sure), millions of dollars would not be thrown into the water. This "natural Individuality operate" also that even if you practiced a lot in demo accounts will not be free to make mistakes in the real world. All the vices and weaknesses that you make to your demo or simulation accounts will repeat in the real (anyway), this lack of guidance or mentoring and much of his inexperience. 

Conclusion: Do not do it properly Back testing become permanent loser. 

If you try to operate a system in real market without prior verification of their performance statistics, the only thing it will do is destroy their own money. 

Why is it so important to Backtesting? 

I. Because you will have "some statistical certainty" of the weapon you use and the efficiency of it, on success in opening and closing a position. 

II. Because it will reduce their fears to enter the market. 

III. Because when you trade Forex you need to TRUST (and many believe me), in his method, knowing that anything can happen in the market and often in the most unexpected moments. 

IV. Because Forex traders are not SEER. Do not try to gamble with your account and operate the instinct or a hunch. Using a well tested method is to be responsible and it is just that, a basic quality that should be a trader. 

Writing a Backtesting: 

Is laborious, but when you have the template already developed will serve to evaluate any strategy. First you must have (obviously) the strategy to be measured. This must be clear and have specific inputs and outputs. Here let me be clear, I mean when I say specific to eliminate any subjectivity and only enter or exit using their indicators. Another aspect is that this method to evaluate not have too many indicators. Having many indicators only slow multiple entries and filled with false income market because while (for example) the momentum and stochastic input will indicate, it is possible that the ADX and the MACD does not or vice versa. Sometimes in our zeal to improve the method we even "decorate" of many indicators that ultimately we can only delay the decision-making. 

Then simplify the operation and its measurement. 

With an established method should choose the currency pair you want to evaluate and temporary space. If you, only business is to operate for a few hours, then choose a time and space according to the hours that you could be on the market. Other measure of time but will not rule it tied to the availability of the operator. You choose, whether measured in time method Americas, Europe or Asia. Unlike other markets do you have a choice here. 

This course will develop a simple template in Excel which shows the pair you're using, the entry price (depending on your method) and the starting price. Between the two prices (input and output) will also maximized. That is the most won and lost as much. Such information is vital for analysis. In principle could separate all the top cattle and group them as a set of events which we could obtain the mean and standard deviation. What did we achieve this? Know with any statistical certainty where the greatest concentration of these maximum and this will provide the basis to define below its limit (at time of scheduling your method). For example, if 65% of the maximum concentration of the method lies between the values ​​of 90 and 70 (ie 2 for quantities) then it could be any value in this area that you choose to be your limit in the future. But you could also enlarge the spectrum of pip's concentration or shrink it and make the respective adjustments. The same occurs from the side of the maximum losses. And would have to be reasoned this way: "How could endure my method in pips to close or not this position and return to win some" (ie, discover the most suitable stop). The key question then would be: How much data should be evaluated? Personally, I think from 200 to 400 data, which represent 3 to 5 months approx. Yes, it is laborious, I know (never said I was single), but very effective. With a well worked Backtesting you will have a devastating machine strategy that lets you find the most suitable system to win consistently and not a few weeks or months tales. 

Finally remember that your limit should always be greater than your Stop. ALWAYS. If your method or the method of operation that you have earns 35 pip's and when you lose you do with 40 pip's then capital risk considerably (without considering the spread and commissions). Other cases are worse, win 5 and lose up to 20 pips pip's no sense or logic and would best be discounted out of hand. But oddly enough, some operators who are just starting do that. It is therefore important to disseminate and articulate these issues.