Backtesting and its importance.

Backtesting in my opinion is a very important aspect of trading which not many people know about simply because the process of it doesn’t sell in the get rich quick schemes. So what is it? Backtesting is when you go back in time and record data per your rules to see if this particular strategy works on this particular pair and time frame. It is highly unlikely that a strategy works on all pairs and timeframes or to the same extent. Some are just better suited to different market conditions which different markets provide at different times.

How do I personally backtest? I choose a strategy and have my rules around it before I go into it so when I am testing it either meets the rules or it doesn’t. I prefer to go back as far as I can depending on data but at least 5 years would be a healthy sample for me personally as I mainly trade off the 1hr. I will then open up the different timeframes I am using (if multiple are needed) and set them to the set date. I then go into replay mode on Trading View which I would recommend and click bar by bar until my setup rules are met. Once met I will go into my spreadsheet and record the minimums.

  • Open Date and Time
  • Entry Price, Initial Stop Loss, Target Price (multiple)
  • Closing Date and Time
  • Closing Price
  • Pips won/lost

I would encourage you track much more than that and take notes on each trade. Even a basic comment written down will make it stick to your subconsious at least. You can also track any additional filters you have or rules which you would like to keep an eye on. I would try and track as much data as I can at once rather than going back multiple times as it will be very frustrating.

Example

How important is it then and why? What benefits does it have to you and why should it be done. Here is a quick video to explain these things with a real example from my trading.

So there it is. Now it is not impossible to become profitable without it but it certaintly increases the chances and lowers the duration of the whole process. Try it out for yourself and see the difference it makes to your trading if you haven’t done it already. Hope you found some value and potentially learnt something new here, be sure to follow me on social media and keep up with more tips, analysis and results of my journey.

Lach

Published by Lach Plays Trading

I'm a forex trader whos journey began January 2018 and has had its ups and downs but has taught me a lot about the markets and myself as a person. Documenting my journey and sharing my experiences for you to be able to learn from them and my prior mistakes. Fully transparent, not afraid to show losses or speak exactly what comes to my mind.

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