Strategy Testing – Forex Academy

Coming up with a new trading plan can be exciting. It can make you want to jump straight into the markets and use it to make you some lovely money, but should you be jumping in now? Have you actually tested the strategy out and can you be sure that it actually works? The only way you will find out the answers to those questions are if you thoroughly test it out.

Testing the strategies that you come up with can actually be seen as far more important than actually coming up with it. This is mainly due to the fact that anyone, even someone with no knowledge of trading could actually come up with a strategy. This doesn’t mean that it will be a good one or one that will actually work, but they will be able to come up with one. This is where the testing comes in, this is where you can differentiate between the good strategies and the bad ones, but it also offers far more opportunities than that.

So why do we test? We test for the simple reason of wanting to make sure it works. We do not want to get into a live trading situation nowhere we put a strategy into practice just to find that it falls apart or doesn’t actually function as a strategy. The strategy needs to have entry criteria, and exit criteria, and some risk management built into it, if any of those parts fail, so will the entire strategy.

We can test them in a number of ways, the best and most prevalent way of doing it is via a demo account, this account will mimic the trading conditions as closely as they can to live ones. This allows you to try out your strategy on something that could almost be considered a live trading scenario. If your strategy is successful here, then there is a good chance that it could be on the live markets too. It should be noted, that being successful for one or two trades is not enough, it needs to be consistently tested for at least a few months to know the full extent of how good the strategy is.

Let’s say you are testing a strategy and everything is going perfectly, this does not mean it will on a live account. While the conditions are similar, there are some distinct differences such as commissions and slippage, these do not exist on a demo account. So if you are taking small profits to be sure to take this into consideration.

There are also backtesting facilities available these take your strategy and will apply them to the last years of trading to see how it would have performed in the conditions that had occurred in the past. This can give you a small indication of how successful it could be in the future. This is not a 100% accurate testing method but can be used as a viability indicator.

So you found an issue, that is the whole point of testing. This gives you the opportunity to resolve that issue and then test again. This cycle should continue until you are 100% happy with the strategy, only at that time should you troy and deploy it onto the live markets.

Even with a strategy that works perfectly on a demo account, you need to stay disciplined, expect some losses, and always analyse and adapt the strategy as it needs. No strategy is full proof, they always need adapting and changing so be sure to stay on top of it and continue testing as the years go by.

If you plan to succeed as a Forex trader, you should be able to distinguish between good and bad business strategies. While the easiest way to measure success is to observe the profit and loss summary for any given strategy, there are other issues to consider when choosing a trading strategy.

Trading Strategies Must Be Personal

Business strategies must be personal, and for very good reasons. This is because markets are very volatile and very emotional at times. Many traders implement risky business strategies, and that may not be the best option for you. Just for this reason, if you are thinking about copying someone else’s trading strategy, you should look beyond the basics of the strategy and also consider the aspect of risk management, to determine whether it is right for you.

Be brutally honest: if you don’t feel comfortable keeping an operation in strategy or placing operations according to the rules that are part of that strategy, no matter whether this strategy has an expectation of long-term profitability or not. You will find it difficult to follow the rules and will not achieve optimal results.

Understanding the Expectation

Expectation is a word you should use quite often, especially when determining whether a negotiating strategy is good or bad. A trader will understand that the trading system has a good chance of making money in the long term based on this figure. The expectation is calculated by taking a calculation of the results to calculate the typical profit of each trade place. If negative, the strategy would be a losing strategy. If it is positive, then that strategy is successful. The calculation combines the number of operations that are one with the average loss of the losers and the average gain of the winners as a formula.

The mathematical formula for calculating expectation is:

(Gain % x Average Size earned) – (Loss % x Average Loss Size)

This gives you a general impression of how much you can expect to earn per trade. It doesn’t matter if you make money most of the time or infrequently, it all comes down to what math works in general. For example, there are traders who earn money 15% of the time, but those profits are much greater than its losses that the system can prove to be profitable. The question, obviously, is whether it can cling to a strategy like that. Most people can’t, so clearly you have to think about it.

So, does a strategy always depend on a set of variables?

Some strategies take into account a specific set of variables. To give an example, there is a strategy known as the ‘London Dawn Strategy’, who looks at what London does when London traders and the rest of Europe get on board. This is because the most liquidity during the day is during the European session, so it makes sense that perhaps the large amount of money is making the market move in a particular direction. Logically, if you are working or sleeping at that time, that strategy will not work. It doesn’t matter if the strategy works or not in this case, what matters is that it won’t work for you. Fortunately, there are enough strategies that can work within your boundaries, so all you have to do is look for one with variables that match yours.

The Markets are Changing

One of the most important things to keep in mind is that financial markets change. Sometimes that feeling fades, sometimes it is the general tendency that changes (some would say they are the same). Many long-term traders are very reluctant to change a strategy that is used on a daily basis, but in reality, sometimes the situation demands that you do. It is for this reason that at all times you must be looking for possible changes in the performance of any trading strategy. A really good strategy will adjust to new market conditions, while an incorrect strategy could continue to work when it is not appropriate.

For example, markets may suddenly calm down for several days at a time, and you need to understand how to negotiate this. Obviously, a long-term trend tracking strategy is not going to work as well in this scenario. For this reason, many traders will need to have a couple of different systems, but you have to recognize that it is very important to use the right system in the right scenario. What I want to express with this is that something that uses the stochastic oscillator usually doesn’t work well on a trend, but it does pretty well on consolidation.

Obviously, something that is expecting Bollinger bands to offer trading opportunities will tend to be much better in some kind of trend or at least in general volatility. Knowing the scenarios the system tends to focus on, then it can exchange the appropriate system at the right time and not become obsessed with the results itself, as some systems simply should not be exchanged in certain scenarios. In short, even the best strategies don’t work all the time, so it’s a good idea to consider some solid forex trading strategies when the market changes. Good or Bad Trading Strategies

In Conclusion

I think systems are like tools. In another way, you should be able to apply the right tool to the right job. I also think there’s no “magic bullet,” so you should be careful thinking that way. There’s an unwritten law in the business that can give two traders a winning strategy and expect completely different results. That is the most important thing to keep in mind. Any business strategy can be good or bad, depending on how and when it is implemented.