Forex: A Few facts about Back testing

Back testing is a crucial part of a forex trader’s trading plan. It is a way in which traders try to understand the trading system by applying it (i.e. a trading system) to a historical data to figure out how exactly the system would have performed in the specific time period. One of the most notable merits of back testing is that traders can actually gain ideas with the help of just a very few keystrokes and weigh the efficacy of a strategy without even risking funds.

Modern trading platforms have introduced back testing functionalities

There are several well-known modern trading platforms (like CornerTrader) that give you the chance to back test your idea. It is hailed as a risk-free way to evaluate your trading plan and then refine the same, if required – before applying the plan in the actual market. It is important to note that the strategy or idea that you have, needs to be quantified before it can be back tested. At times, several traders seek help from credentialed programmers to convert the idea to a testable form. The most common way in which the programmer can help you out in this regard is to turn the coding idea into a proprietary language which can be easily identified by the trading platform for back testing purposes. The trader can also twist the system a bit with the help of user-defined variables introduced by the programmer.

Different traders back test at different degrees

Traders are able to back test in various degrees based on their beliefs, experiences and objectives. As far as the less experienced traders are concerned, they will not really be satisfied until a particular idea has been back tested in several timeframes so as to be totally sure of the worth of the strategy. A pro trader, on the other hand, just needs to test the idea in a single time frame to ascertain whether it will work or not.

Optimization Studies

Now, the obvious benefit of the back testing facility is that it helps the trader adjudge the effectiveness of an idea. This particular method can further be bolstered by optimization studies. Let us discover what these optimization studies are.

There are several trading platforms that offer the optimization studies. These studies involve entering a range for a fixed input and then allowing the computer to make the necessary calculations to deduce which input would have performed the best. The multi variable optimization can do the calculations for two or more variables blended together to figure out whether the combination of the two variables would be successful or not – or else, to find out at which level they would deliver the best result even if they are successful.

More about back testing

An ideal back testing system should reflect the win rate percentage, the trading frequency, the significance of slippage and commissions, the longest normal winning and losing streaks and the maximum adverse excursion.

There is, at once, a number of advantages to be secured from back testing. However, traders must not be relying entirely on the results of back testing – it is only a part of the evaluation process but the not the process itself.