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What spread setting to use on backtesting forex?

Backtesting is a popular way of testing and evaluating forex trading strategies. It involves using historical data to simulate trades and determine the effectiveness of a trading strategy. When backtesting forex, one of the key parameters to consider is the spread setting.

The spread is the difference between the bid and ask price of a currency pair. It is the cost of trading and is determined by the liquidity of the market, the broker, and the time of day. In backtesting, the spread setting refers to the amount of spread that is factored into the simulation of trades.

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There are different spread settings that can be used in backtesting forex. These include fixed spreads, variable spreads, and real spreads.

Fixed spreads are set by the broker and do not change regardless of market conditions. They are easy to use in backtesting as they provide a consistent spread value for each trade. However, they do not reflect the actual market conditions which can vary widely during different times of the day or market events.

Variable spreads are spreads that change depending on market conditions. They are more reflective of real market conditions as they can widen or narrow depending on the liquidity of the market. In backtesting, variable spreads can be used to simulate different market conditions and their effect on the trading strategy. However, they can be more difficult to use as they require a more complex backtesting algorithm.

Real spreads are actual spreads that occur in the market. They are the most accurate representation of market conditions and can provide the most realistic backtesting results. However, using real spreads requires access to historical tick data which can be expensive and difficult to obtain.

When choosing a spread setting for backtesting forex, there are several factors to consider. These include the type of trading strategy being tested, the time frame of the trades, and the broker being used.

For example, if the trading strategy being tested involves short-term trades, such as scalping or day trading, a variable spread setting may be more appropriate as it can simulate the changing market conditions that occur during these time frames. On the other hand, if the trading strategy involves long-term trades, a fixed spread setting may be more suitable as it provides a more consistent spread value for each trade.

The broker being used can also influence the choice of spread setting. Some brokers offer fixed spreads while others offer variable spreads. It is important to choose a spread setting that is consistent with the spreads offered by the broker being used. Using a different spread setting than what the broker offers can result in inaccurate backtesting results.

In conclusion, the spread setting is an important parameter to consider when backtesting forex trading strategies. The choice of spread setting should be based on the type of trading strategy being tested, the time frame of the trades, and the broker being used. Whether using fixed spreads, variable spreads, or real spreads, the goal is to choose a spread setting that provides the most accurate representation of market conditions and produces the most reliable backtesting results.

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