What is Backtesting?
Backtesting is a process of testing a trading strategy on the historical currency price pair data to evaluate and check the effectiveness of your strategy. The assumption behind the backtesting is what worked in the past and what will do in the future. It means that if your strategy is profitable based on the past data, then the chance is that it will be effective in the future market condition.
Before you backtest any strategy, you need to have a trading plan. Without a good trading plan, the result of backtesting is inaccurate and ruins the purpose of backtesting.
Some of the important elements that your plan must include are when you enter and exit the trade, how much you are willing to risk on every trade, trade duration, where you stop losses and start getting profit. When you place your trading plan, you backtest the strategy.
There are some benefits of backtesting.
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Optimize a strategy: the testing helps the trader where your strategy needs improvement. It allows for optimizing the single part of your strategy.
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Developing Analytical Skills: It will help you to spot trading opportunities. You will be able to improve your analytical skills through backtesting.
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Time-saving capabilities: You can check the strategy's profitability without testing it in real-time. Here, you can identify the strategy's effectiveness and save time.
What is the best method to test the trading strategies in forex?
People think that there is only one method of backtesting strategies, and only the expert can test the strategy. But the reality is that anyone can backtest the strategy. There are two types of backtesting: Manual and Automated. You can use different options to explore.
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Manual Backtesting: The manual backtesting in which you can manually scroll the chart and find the trade that fits into your strategic plan. You need to scroll the chart bar by bar and see the potential trade-in for this backtesting.
There are some benefits of manual backtesting are listed below:
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You can learn how the system works and execute the single trade. After that, you can set up your program or create an automated program that works for you.
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Anyone can use it.
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It stimulates the live trade enter/exit.
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No money risk.
Some drawbacks of the manual backtesting
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Manual backtesting is time-consuming.
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No guarantee it works on the live trading.
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Here, you need to set a rule during the testing. If you change the rules in the middle of testing, you do not get accurate results.
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Automated Backtesting: You create a program that works for you in this backtesting. It can automatically enter and exit the trade for you.
The benefit of automated backtesting
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Make money when you sleep.
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No money risk at the testing phase
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Remove the emotion of trade.
Drawbacks of automated backtesting
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You need to know the exact parameter of the trading.
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You need to check the system on a daily basis.
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No guarantee that it will work in the live trading.
Read this post: Deriv Trading
Conclusion
Now you get the essential information about both automated and manual backtesting. It's time to decide to use which one is best for you. But I highly recommend you choose one and become an expert on that method.
