Forex Backtesting - Secret Forex

Learn How To Trade Forex - Make Money Trading Forex

Hannibal
Forester

email us

MADDISON
HOLDINGS

RSS
FEED

TOP PRODUCT REVIEWS

HOME PAGE

LEARN FOREX TRADING
(Video 30 seconds)

BROKER REVIEWS

ONLINE FOREX TRAINING

ALPHA INDEX:-

BOOKMARK &
SHARE THIS
PAGE AT YOUR
FAVORITE SOCIAL
SITE

(Hover Your Mouse)

FTC STATEMENT
We may receive a commission payment if a visitor to this web site makes a purchase via a hyperlink from this site.

Is back-testing a reliable method for evaluating technical strategies?

Forex trading is risky. To reduce risks, traders employ different strategies and analytical tools, but even then, there is a degree of uncertainty which cannot be entirely eliminated in the chaotic environment of trading. Even the best technical strategies can at times lead to significant losses, and the only way to avoid such losses is ensuring that money management tools and risk controls are applied vigorously.

But some traders find even those approaches insufficient for establishing the safety of a strategy. Many are misguided into thinking that we can discover methods which generate excellent returns in all circumstances, and then turn to back-testing to isolate and identify them. Applying their strategies to historic data recorded over the course of decades in some cases, and traders believe that they can refine their strategies in such a way that perfect harmony with the price action of the past is acquired. Is that possible? To an extent, yes. Is it useful? Unfortunately, no.

There are many errors in the reasoning that attaches too much importance to back-testing. First of all, there is no evidence to back the belief that prices somehow repeat themselves. Triangles, trends, and ups and bottoms are constantly encountered in trading, but each time we find them in a different formation, a different order, with a different degree of volatility. Indeed, the rules that generate the price action are unknown, and as the market action is chaotic, I we cannot expect the same rules to generate profitable outcomes at all times. Since back-testing applies the same strategy to past events, and past events are extremely unlikely to be repeated in the future, the results generated have little relevance for future price action and profits.

In addition, back-testing ignores many issues which are specific to the broker. Server failures, software crashes, slippage, and many other unpredictable events can complicate trade decisions greatly and necessitate human input. The issue is even more complex if we consider that not all back-testers use automated tools. In the cases where emotions have a role, back-testing is almost entirely useless. Finally, although the market can show calm and stable conditions overall, problems related to your own broker, such as widening spreads, and lack of liquidity may create an environment that is very different from what is assumed for back-testing.

The various ways of forex broker comparison can grant us insight into the efficacy and reliability of a firm, but no broker will offer the perfect tools which will not fail, or generate the unrealistic returns claimed by traders who depend on the results of back-testing. Back-testing is fine as an educational tool, but it not a way to discover successful strategies which will help us profit in the unpredictable environment of the real market.

article ends...

Guest Article

Here is an interesting and helpful article on
Forex BackTesting

Forex BackTesting

Back Testing Forex

Forex BackTest

FOREX BACKTEST

Conducting a back test on your forex trading strategies is an extremely wise thing to do.