The Forex market is famously the largest and most traded in the world, with 10 million traders seeking to profit from buying and selling currency pairs. Discover how backtesting can help you hone strategies to avoid losses and maximise earnings.
What is backtesting?
Backtesting is a way of assessing whether or not a trading strategy is likely to work well. Using historical data, you can apply entry and exit points to a real period in the past and see how your investments would have fared. While not always true, it’s logical to assume that tactics that would have worked are likely to again – and vice versa.
Seeing how it would have played out retrospectively also reveals the strength of the strategy and makes it easier to predict the effect it might have in the present.
Trialling new strategies in a safe space without using real funds negates the risk of incurring losses, so you can be experimental without endangering your capital.It also gives you the opportunity to keep tweaking until you’re confident it could work.
How to try backtesting
You can experiment with backtesting through online platforms from leading companies like Tradu which have reliable historical data and dedicated areas for trialling strategies. They’re also up-to-date with the latest market trends so you can compare and contrast.
Once you’ve found reliable data, try to distinguish a period similar to the present so your testing results are more likely to be accurate. Check that there were no significant events which skewed data during this period (as far as possible – there will always be some).
You should also ensure quality granularity and range in the data you use so you can assess the effect of your strategy in sufficient detail across a variety of situations.
Backtesting for forex
Finding the right entry and exit points is essential to success when trading all markets, but most especially Forex where fast-changing exchange rates cause a constant rise and fall in the relationships between currency pairs.
From a country’s economic health and political decisions to sudden global events, multiple unpredictable things can affect currency strength. This makes it hard to find and be confident in trends, but backtesting provides a means to identify repeating patterns and separate out unusual spikes.
Using backtesting alongside trading tools such as indicators and oscillators enables you to verify what you perceive to be patterns and find early entry points in currencies climbing in value. It also gives you a rough idea of when you can expect the trend to begin a downward turn so you can get close to selling your shares at the most profitable moment.
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