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When you backtest a theory, the results obtained are highly dependent on the moves of the period tested. Backtesting a theory assumes the future will be what happens in the past. While most of it is performed using machines, you can execute it on a list of monthly or yearly data manually.

It is a simple and straightforward approach which makes it very popular as an exciting and safe tool in the eternal search for the perfect forex strategy in the trader community. Traders who use this approach to test their trading plans hold to the assumption that what succeeds in the past will work for the future as well. The most common testing technique among technical traders is backtesting of technical methods in light of past values.

A basic principle of technical analysis is that price patterns reproduce themselves. For pending orders, however, you must also define the distance in pips. Only then can you place the appropriate pending order. These remain in effect for all future trades until you modify or delete them. Rinse and repeat until you reach the end of your data set. Modifying Simulated Trades The procedure we discussed above summarizes how forex backtesting works in a nutshell.

From having made a mistake to wanting to move your stops into breakeven or adjusting the profit target, there could be numerous reasons why you find yourself facing this issue. This brings up a window that shows your market and pending orders.

You can also check some statistics here, but we will get into that later. Depending on your trade, a few lines will appear on the chart representing your TP, SL, and entry level for pending orders. You can manually drag each line and move it wherever you want.

The risk-to-reward ratio will be calculated in real-time, as will the dollar amounts. Multiple Timeframe Analysis Multiple timeframe analysis is just what it sounds like: Using multiple timeframes for trading. Most traders who use this technique monitor three different timeframes, such as the daily, four-hour, and hourly.

The analysis is done from top to bottom, with trades being opened on the smallest TF. Multiple timeframe analysis is very easy to accomplish with Soft4FX. Make sure you open the charts and navigate to the highest timeframe. While doing this, you must stay on the source chart. After you click, your lines will be visible on each chart you have opened. Scaling Out of Trades Scaling out means that you exit your position at different price levels. If your method also involves scaling in that is, you divide your risks into smaller position sizes and enter at different price levels , you can scale out simply by systematically closing your trades.

However, if you use scaling as an exit-only tactic, you will need to know how to make partial position closes. A partial position close means that you close only a certain portion of your position and let the other run. You can either enter a lot amount or choose which percentage of the position you want to get rid of.

Accounting for News Whether you want to avoid trading around the news or take advantage of it, Soft4FX has you covered. It will take you to the economic news panel. Here you can see the upcoming and past news releases along with their expected impact. Then you can exit the window. On your chart, activate the news tab. For upcoming news, there will be a red dotted line, while for news that has already passed, there will be a grey dotted line. Evaluating Your Performance This is the last stage of backtesting.

Maximal Drawdown A drawdown is the reduction of your trading account after a losing period. Source: BabyPips. The maximum drawdown is calculated for equity, meaning it considers your account balance plus the value of floating positions.

This is in contrast to the absolute drawdown, which shows how much the balance has decreased in relation to the initial deposit. Looking at only this number is misleading because, in reality, you experienced a much more severe losing period, as shown by the maximal drawdown, which would have been To conclude, we recommend that you focus on the maximal drawdown when evaluating your performance.

Every trader experiences drawdowns, but successful traders can withstand these losing periods both mentally and financially. If your drawdown is too high, consider risking less of your account per trade. ForexTrainingGroup has a great guide on the topic of drawdowns if you are more interested. Average Length of Trade A trade that takes you less than a minute to finish during backtesting might take weeks or months in reality. There are two great advantages of looking at the average trade length metric: It gives you a sense of stability if you know when you can expect to close your positions.

It indicates whether your strategy falls short of your preferred trading style. Open your backtesting statement and highlight the transactions section.

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A basic principle of technical analysis is that price patterns reproduce themselves. But while it is common, the unpredictable, and continuously shifting nature of the markets makes backtesting a questionable method.

Not only does the quote change but also the laws that describe the quote change, meaning that a procedure that is valid today may not be so effective after a short period has passed. When we backtest a technique, what we test is its success in situations that might never be replicated again.

Of course, there are still circles, pennants, breakouts, but the exact arrangement of one of these shapes is sufficiently different to invalidate the validity of previous trading choices in each and every other event. Do you want to become Success Forex Trader? The Forex Scalper teaches you the best scalping trading strategy using supply and demand zones which is already traded and tested by thousands of TFS members and performs daily trades.

You can then summarize the results to see your overall performance. Main Settings To set the general parameters of your simulated trading account, you will need to adjust the main settings. You can decide when to start the simulation and whether you want to automatically end it at a certain date or continue until the last data point.

You can choose only between the two currencies you test. Nevertheless, for the starting balance, it makes sense to use a balance that you could deposit in real cash. You want to imitate real-life conditions as closely as possible and your account size influences things like position sizing and risk management.

As the last setting, you can decide whether you want to allow rewinding. We initially disabled this option, but after hours of backtesting, we got tired and missed some great opportunities that we would certainly have recognized in a live trading situation. So, if you can use it sensibly, we recommend that you allow rewinding, as it enables you to move back a few candles whenever you clicked too fast and ignored a trading opportunity.

Advanced Settings Advanced settings is about fine-tuning some less fundamental aspects of the simulation. To begin, you can change the pip size and the size of one contract. What you might indeed want to change are the leverage and commission settings. For both, we recommend sticking to the conditions your broker provides. As a general guideline, most EU traders can access leverage of for forex, while traders in the US have a slightly higher limit of Spreads are typically variable unless you have some specific account type.

For example, some brokers provide accounts with zero spreads and a fixed commission per lot traded. Before starting the simulation, you have the option to set the initial history on the charts. This might come in handy if you want to plot support and resistance levels or do some preliminary analysis. You can also decide on the number of bars the chart can keep. Feel free to change the colors and add any indicators you need.

If you work with more charts, you might want to create a custom template so that you can apply it to other charts with a click. Make sure the custom template is created on a chart other than what is opened for the simulation. Otherwise, if you create a custom template on a simulated chart, the Soft4FX toolkit at the top-right corner will be included in the template. Once you finish setting up your charts, you can begin the market simulation.

Either way, move forward until you bump into a valid trade setup. Then, depending on your strategy, place a market or a pending order. You must set the details of the trade at the top left corner. For market orders, this is all you need. You can click buy or sell and the trade will be executed. For pending orders, however, you must also define the distance in pips. Only then can you place the appropriate pending order.

These remain in effect for all future trades until you modify or delete them. Rinse and repeat until you reach the end of your data set. Modifying Simulated Trades The procedure we discussed above summarizes how forex backtesting works in a nutshell. From having made a mistake to wanting to move your stops into breakeven or adjusting the profit target, there could be numerous reasons why you find yourself facing this issue.

This brings up a window that shows your market and pending orders. You can also check some statistics here, but we will get into that later. Depending on your trade, a few lines will appear on the chart representing your TP, SL, and entry level for pending orders. You can manually drag each line and move it wherever you want. The risk-to-reward ratio will be calculated in real-time, as will the dollar amounts.

Multiple Timeframe Analysis Multiple timeframe analysis is just what it sounds like: Using multiple timeframes for trading. Most traders who use this technique monitor three different timeframes, such as the daily, four-hour, and hourly. The analysis is done from top to bottom, with trades being opened on the smallest TF.