When is the right time to join the party?

In This Video:
01:30 Back Testing Has Many Limitations
03:20 Back Testing Is Excellent For A Mechanical System
03:53 The Best Practise Is From The Right Hand Side Of The Chart

Can back testing really help your Forex results? Let’s talk about that and more, right now.

Hi Forex Traders, it’s Andrew Mitchem here, the Forex Trading Coach, and today is Friday the 26th of June. In this video and podcast I want to talk about back testing.

I have an email here from Nicholai who is a client of mine, and he said, “First of all Andrew, another great start to the week. I’m up +16% on a live account since April, trading just once a day at 5 o’clock New York time on the daily charts; the 12-hour, 8-hour, 6-hour and 4-hours. I don’t take anywhere near as many trades as I used to, only the highest probability set-ups, and this is what has really helped me progress further.”

First of all, that is a fantastic result, Nicholai, up +16% April, May, June; in two and a half months, up +16% trading just once a day. So that’s not watching charts all day long, it’s just trading once a day for probably fifteen minutes total per day.

But actually, on to the question. Nicholai said, “Andrew, can back testing really help me as a trader?”

Lots of people out there – lots of gurus – advise that you buy back testing software and they firmly believe that it can speed up your journey to becoming a successful trader.

Do you believe that our eyes can be trained quicker when we look for the same set up on back testing rather than doing it live?”

Back Testing Has Many Limitations

So here’s my take on back testing. Yes, it can be useful. No doubt about it, it can be useful, but you have to remember there are many limitations to when you’re looking at your strategy in hindsight with back testing data. A whole heap of things, such as:

Obviously it’s not live so you don’t have the emotions within your trading.
What was the sentiment like in the market at the time?
You know, what day of the week was it?

Was it the beginning of the week, was it middle of the week, end of the week?
What time of day was it?

What was the strength and weakness with all the currencies at the time?

How was the currency that you’re looking at performing against other currencies at the time?

What was the news at the time?

You know, had there been any news announcement just prior, or the day before, or was something about to be announced?

Did it affect that currency?

So there’s all sorts of different things that you cannot quite get to feel real when you’re back testing.

What time of year was it?

Was it coming up to a holiday like Christmas or Easter, or was it in the middle of July and August, which is the northern hemisphere’s summertime when the market generally goes a bit quieter.

So all those things just that you need to understand with any back testing, whether it’s proper software or whether you’re just looking back through your charts, just bear in mind that there are those limitations there. And, as I’ve mentioned, it’s not trading from the right hand side of the chart, so it’s quite easy with back testing to say, yes I would have done this, or I would have got out here, or I would have put my profit way up here, or whatever it might be.

But, would you really do that if it was live, with real money? That’s the things to consider.

Back Testing Is Excellent For A Mechanical System

If you have a 100% mechanical system – so if A and B line up, then you do C – if that’s the way that you trade, then absolutely back testing could be just a really easy to follow the set-up and to get fairly accurate results. But if you have some form of discretion and human input into your trading approach then just consider those limitations.

The Best Practise Is From The Right Hand Side Of The Chart

You know, absolutely go back and look at charts and look and what might have happened and what you might have done to train your eye. But don’t forget, that the best form of practise you can do is from the right hand side of the chart, in real time, right now, without any benefit of what’s coming. There’s no hindsight there. This is where we are right now in the market. This is where I see the currency pair that I am looking at; this is the price; this is how it is performing against other currencies; this is any upcoming news that’s affecting it.

Right now; right hand side of the chart: trade from there. Even if you trade – if you want to move on from demo – just trade small amounts, just micro-lots. Just on a live account so you have the feeling of real money, and of making or losing real money because that has a whole psychological … You know, what affects you and your heart and your head, those two factors can be huge within your trading.

So, Nicholai, to answer your question, yes use it if you find it useful. In terms of back testing, don’t be completely reliant on its results. Trade from the right hand side of the chart. Look at charts in real time. And, as you mention right at the top of your email here, “16% since April, trading just once a day” you’re doing most of it right anyway.

For everybody else who is struggling and wants some information and help and advice on back testing that would be my take on it.

So, I hope that helps you. If you have any questions, just send them through to me [email protected]

Have a fantastic weekend, and I look forward to talking to you this time next week.

Bye for now.