Forex Backtesting Rules

In this paper we will provide some rules which the traders should follow, to increase the profitability, while backtesting their Forex Trading system. Backtesting is an integral part of developing and as well as using a Forex trading system. The traders have to follow some rules and guidelines while backtesting a Forex trading system.
These are listed below.

(1) The traders should check the historical data clearly before initiating the process of backtesting. This examination will ensure themselves about the authenticity of those data with respect to today’s market conditions.

(2) Such historical data should be used which highlight on both the negative and positive global market conditions. The market has been fluctuating every now and then for the last decade. Therefore, the traders should be aware of goods and bads of today’s markets.

(3) The historical data range should be wide enough to reflect the step by step changes in market conditions. If the data are not old enough then, it would be pretty much difficult for the traders to guess the future characteristics of the market.

(4) The traders should use backtesting softwares, easily available in the market, instead of manually performing it. This will reduce the mistakes at the time of data entry or search.

(5) The Forex traders should adopt capital management as a part of their backtesting strategy, for the main aim of backtesting is to increase the profit by reducing the risks. If there is no money to invest then, backtesting is not worthy at all.

(6) If somebody specialize in some currency pairs, which are trading specific, then they should make sure that the data include those pairs to get the best result.

(7) The data models adopted by the traders must provide a real amount of slippage. In today’s volatile market condition, where some slippage will definitely occur, the necessity of those slippages are increasing day by day.

(8) Finally, the traders should not take their investment decisions by depending completely upon the backtesting results because, no testing can produce cent percent accurate result.

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Last Updated on : 23rd July 2013