Testing your strategy is very important so lets talk about that.
There is one thing you want to avoid when you build your trading system. And it does not matter if you want to use it to trade manually or with robots.
So what is that?
Changing the rules when you test your system.
I’m guilty of that mistake, too.
In short, if you test your system for some time and modify too many things then it may be impossible to improve it.
You know how it works. It starts small. I will change only that one parameter. Next, there are other changes. What about that and that?
As a result, you started with one system but after all that small changes you ended with a totally different system.
That’s why I have a few tips which will help you to avoid that.
The starting point is when you have an idea for your trading system. You played with it, tested a few different variants and you can write all your rules on paper.
With your system on paper, you can start testing.
1. Before proper testing, do some pre-testing
THIS is the phase when you play with parameters and test small tweaks. You want to test your system with different pairs and instruments. Usually, I backtest system for a few months – so, for example, I will spend my weekend backtesting major Forex pairs for the period of the last few months.
During that phase, I will write down modifications to my system.
2. Proper backtesting
Now it is time to do proper backtesting of your system. It takes more time because you want to test different instruments, different timeframes. What is most important, you want to test your system for the longer periods. I recommend testing each for at least periods of 2-3 years. It takes time to do that.
When you are at this stage (of proper backtesting) you want to avoid making too many changes. Of course, if you see in the end that system should be changed then you have to do the changes that you think are necessary and backtest it again.
3. Testing on demo/small live account in real-time
If you are happy with the results of backtesting, you can test your strategy live on demo or small account.
Aim for 100 trades
How to decide if a strategy has potential or not? You want to take at least 100 trades. If you make 100 trades with specific settings, without changing them, then you can tell something about your strategy.
How to make backtesting easier?
I will write about it in the future. For now, I can recommend you two ways to backtest. First, search for backtesting with TradingView. This platform is very popular and it gives you a possibility to do some backtesting. Another way to backtest – look for Forex Simulator from Soft4FX. This is a great backtesting tool for Metatrader 4. With the help of that software, you are able to do real good backtesting of your strategy.
Hope that you learned something!