Technical Trader’s Dilemma–Back Test Or No Back Test
All traders like to test their forex trading strategies before they put them to practice. We prefer to have an idea on the potential success of our approach before we risk real money trading it.
Unfortunately, although testing through trading is risky, there is no other way of establishing the reliability of a trading strategy. And while back-testing is popular, there is no evidence to prove that it actually works, or that the results generated by it have any validity outside of the testing period. In other words, back-testing shows that a trading strategy could have been successful in the past, and says nothing about its future profitability.
The main problem about back-testing is the nature of the forex market. The forex market is chaotic, and not only do the price patterns change all the time, but also the rules and economic dynamics that create them change too. For example, although central bank interventions may create a predictable zigzag pattern for a currency pair at one time in the past, the bank may abandon this policy a while later, creating an entirely different situation for forex strategies. At other times, market action is seemingly random,.and trying to trade it on the basis of an all-knowing strategy is a mistake in itself. In such cases, money management methods, and not technical strategies are of the utmost importance in ensuring successful outcomes in trading.
Back-testing is valid in a environment where at least the rules that create the price trends in the market can be defined with precision, and have a degree of predictability in the long term. This is altogether absent in the forex market. And what to say about the many factors ignored by back-testing by definition? What about power failures, computer crashes, widening spreads, slippage, software problems which are not taken into account in back-testing? A crucial property of trading is that lack of prudence and common sense in a short time can wipe out the gains of weeks, months, and in some cases decades. The false confidence inspired by the faulty method of back-testing only causes traders to relax their risk controls, with disastrous results at times.
So instead of testing your forex strategies in light of historic data, compare forex brokers in light of their past record. Instead of wasting time on back-testing, trade with real money in a real account, but with small sums, and very low leverage, as you gain experience. You can’t conquer without fighting, and you can’t get rich without trading. And to trade, you need to take risks. Do not expect to avoid the responsibility of risk management by back-testing your strategies. Back-testing is fine as a way of learning, as you practice the various indicators and concepts of trading to gain a better understanding. But it’s not a tool of prognostication, and not a way of x-raying the market. Avoid later disappointments by taking precautions now, and building your education on solid foundations.
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When back-tester follows the shortest bar route, it never looks beck. It cannot take into account an order placed at already passed price (Stop Loss). The back-testing result of this method can be sometimes better than the … You can make Forex Strategy Builder recalculate the current strategy by pressing the "F5" key. Every time the back tester will calculate the strategy using random price-route within the ambiguous bars and the balance c…
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