Importance of Back Testing A Forex Strategy
Most successful Forex traders know how to incorporate back testing techniques into their trading regimen. They understand the pitfalls – what to look out for – while they apply this process. However, do you know what and how much you’ll get out of back testing a forex strategy? The easiest answer is – plenty. Let’s look at some of the key benefits of back testing a forex strategy.
Back testing strategies allow you to trade with a relaxed mentality
Traders, who don’t utilize back testing techniques to verify their trading strategies, usually fail in the long-term. They give up after a series of losses. Then they try a new and untested strategy to fail once again.
Most traders don’t realize the significance of back testing a trading strategy. You can say they are doomed. Even if these traders find a great trading strategy, they won’t have any idea how to trade. They would probably give up the strategy after a couple of losses. However, traders, who have back tested their forex strategies, would always know how it works. They know its statistics, and thus, would be able to trade with a more relaxed mindset.
Back testing help you to anticipate the future
You’d be able to anticipate the future price movements if you back-test your strategy properly. By back testing strategies that you want to use, you’d have gained significant insight into a currency pair’s past price action movements. Thus, you’d be able to recognize the driving forces behind it better. That, as you have had practice while back-testing the strategy over many years, and in differing market conditions. Furthermore, you will be able to calculate expectancy of your trading strategy. Therefore, you’ll have a comprehensive measure of your trading system.
The most important thing that you’ll experience while back testing your trading strategy is a change in your confidence level. You’ll figure out what to look for while entering or exiting the market. Moreover, you’ll trust your strategy, as you practice and back-test it over multiple years of trading data and in varying market scenarios.
Thus, the key difference with you and other traders will be that you’ll know how to play the game in quiet markets, in volatile markets, and in everything else in between. You, as a trader, will learn that your confidence will ultimately show you the way to trading success. Yes, even if you lose a couple of trades early on.