The Science of Back Testing by Sam Eder

Learning to trade Forex is part art, and part science.

The “art” of trading is the creative thought process in uncovering good ideas and the discipline to follow through on those ideas without getting emotional about them and making mistakes.

The “science” of trading is where statistics, probability, patterns and risk management come in to play. Recognising and exploiting your edge efficiently is a mathematical process that can generally be tested to determine if your hypothesis is correct.

How to test your trade ideas

But how do you effectively test your ideas?

Let’s say you believe that there is an edge in trading off weekly support and resistance levels.

You could back test the idea. Back testing is looking at previous charts to determine if your thesis holds true. In this case you can go back to previous weekly support and resistance levels and how often what you think will happen does.

But it’s not quite that simple. Back-testing has its own flaws, chief amongst them being your biases. When back-testing, it’s human nature to “see what you hoped for”, meaning that your results are flawed (sometimes significantly so).

You could use an impartial computer in your back test to counter this, but that takes time to code. There could be errors in your algorithm, and, since a computer is doing it all, you wouldn’t get to observe and learn from the process. In many ways, using computers defeats part of the purpose of back testing. It can also cost money if you don’t know how to program yourself.

Another method of testing a theory is to use a demo account. A demo account is OK, but it takes time for your results to show. Say you want a sample of a 100 trades, and you only get one trade a day. It will take you 100 days just to test your idea! (And that is not taking into account if you make mistakes).

So what to do?

There is a better way

Imagine if you could test your idea quickly and robustly, across a multitude of situations and market types, and you get accurate results.

With Forex Tester you can choose historical subsets of data, and trade your idea on that data again as if it was live. You don’t actually see the result of your trade until after you place it, so you eliminate unintentional bias. Better yet, you can play the data forward at the speed of your choice, so there is no wait time until you receive your results.

This is why Forex Tester is such a useful tool for the discerning Forex trader.

And now you can Win Forex tester and Forex Copier valued at $500 USD, with no strings attached.

All you have to do is click the link below for instructions on how to enter:

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And don’t forget to share the competition with your trader friends. For every one of your friends that enters, you get bonus entries into the draw.

Win Forex Tester and Forex Copier

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is a co-owner of Forex Signal Provider FX Renew (Get a FREE 30-day trial). If you like Sam’s writing you can subscribe to his newsletter.

View further posts from Sam in the FX Insights section

 

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