USING BACK-TESTING FOREX SOFTWARE
Back-testing software is a step up from manual back-testing. Most forex traders are not even aware of the fact that manually back-testing your trading system is possible. Back-testing software is an underappreciated tool, one that will allow you to manually back-test your trading system at an aggressive pace. Manual back-testing software records your trades for you and enables you to quickly take trades as you advance the historical charts. In many ways, manual back-testing with software is not much different from manual back-testing. The advantages to using software are as
follows: Software will allow faster testing, so you may accumulate experience quicker; the software will do the record keeping for you and allow you to concentrate on the trade signals; you may easily export your data for analysis; and software discourages cheating— manual back-testing software is a hindsight bias killer.
Of the many manual back-testing software packages available, my favorite is Forex Tester. Forex Tester is a manual back-testing software package that will allow you to import any data. You may decide to import forex data, futures data, stock data—any data will work. Forex tester will record your trades and allow you to export your trading data into a spreadsheet, after you have completed your testing, for analysis. The beauty of software-based testing is that it allows you to concentrate on trading your system. In many ways, it mirrors live trading with an account platform.
There are many traders, myself included, who will spend more time back-testing with software because it is much easier than manual backtesting. Back-testing with software helps traders gain years of trading experience in a few hours. However, the real work in back-testing is examining the results. Exporting and analyzing the data from back-testing is where serious traders validate trading systems, find behavioral patterns, and develop strategies to augment profitable trading strategies. These data are gold for the serious trader. Your back-testing data will help you determine your trading patterns (Do you find profits more easily on the daily charts? Are most of your winning trades initiated during the European session? Do you trade particularly well with your system on the CAD/JPY?), and this can lead to more fruitful back-testing sessions. You will also know, after back-testing your system over several hundred trades, if the system makes money for you.
In fact, before you ever risk one cent, you should make hundreds of trades while back-testing to verify that your trading system will capture profits and also to gain expertise with your system. Manual back-testing with software is not without problems. You must look out for the same pitfalls that creep up with manual back-testing, namely hindsight bias. Manual back-testing software makes it easier to avoid hindsight bias, but you still must be careful to only take trades if you have not advanced forward on the chart. Cheating is not allowed when back-testing; your goal is to generate realistic trade results during your back-testing. Also, because it is very easy to quickly execute trades with the testing software, you must watch out for subpar trades. Trades you would not take on a live trading account should be bypassed no matter how tempting it may be to take them during back-testing. Try to back-test as if you have real money at risk. This is the only way to ensure that your statistics and experience in back-testing will closely match your live trading. If you remain vigilant and conscientious during testing, your results will be more meaningful.