An old friend of mine once told me that back testing is not necessary. This is because past results may not represent future performance. To me, that was simply an excuse given by lazy traders who aren’t serious about improving their own trading business.
To a certain extent, I do agree that successful back-testing results do not 100% guarantee success in your live trading. Maybe 90% to 95%? But that is about the closest you can get, to have any form of basic profiling of your trading method and strategy.
How else are you going to find out the win rate of your strategy? What’s the maximum draw-down when using this method? What size should I trade? What kind of money management to use? What is the potential annual rate of return for this strategy? Will I lose money if I trade this method for more than 5 years?
And if you do not have the answers to the above questions, how will you be able to fine-tune your strategies to maximize profit potential and minimize losses? Needless to say, this friend of mine is no longer in this trading business (he’s in the insurance business now, but that’s another story to tell).
Back testing is absolutely needed
My whole point is, back-testing is absolutely necessary if you want to survive in this business long enough to see the returns. And if you set your path right, you will make tons of money later. But for now, let’s focus on the hard work first.
I personally use back testing for a slightly different objective. Most people use back testing to try to find good strategies. But I prefer to do it in the opposite manner.
When I come across a seemingly good trading method, I will try my best to stress-test the strategy during the back testing phase, and try to make the method fail.
I am using Forex Tester 2 for my back testing, and only the best strategies that survived my abuse can make it to my books. If you’re interested in discovering how I became a profitable trader, I highly recommend you to read my review on Forex Tester 2 here.
The logic here is pretty simple. Think about this like preparing for a boxing championship. If you cannot even beat your training robots at home, then you can forget about entering the boxing ring. You will get slaughtered, I promise.
Also, in order to collect meaningful results, try to make sure your data goes back far enough. This is to allow the testing system to provide accurate results regardless of what the market is doing. My daily routine involves 2 hours of back testing and fine-tuning new strategies.
2 hours of Back Testing for one strategy. Worth it?
Forex back testing can be a time consuming process, which takes about 1-2 hour per strategy tested. But it’s important that you invest that time into making sure you have a Forex trading system that’s going to work the way you need it to when it matters most.
2 hours of back testing will probably give you more insight of your strategy than what 2 years of living trading can give you. When you are trading live, you focus on the market and not your system. Similarly, when you are back testing, you focus on fine tuning your strategy and try to perfect it.
I hope you like the post today and do contact me if you have any questions and I will try to help you with everything.