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Talking Points:

  • Downloading chart software with FREE price data, TS Desktop.
  • Writing a trading plan to follow.
  • Manually testing strategies on past data and recording our results.

If you are like me, whenever we make big purchases like a car, TV or the latest cell phone, it’s nice when we get to “try before we buy.” We test drive the car to see how it rides. We go see the TV in the store to see how it compares with others on the floor. We click around on a friend’s cell phone before purchasing our own. But when it comes to trading strategies, we are often stuck between trading a strategy with real money without testing, or spending weeks/months following the strategy in a demo account and missing out on real trading opportunities.

Fortunately, there are ways we can speed up the testing period for our strategies without risking any money in the process. With the proper software, trading plan, and record keeping, we can “backtest” a strategy and be up and running with real money trading much sooner.

Download Chart Software with FREE Data

Before we can test anything, we need software with accurate price data. For all of my analysis, I use the FXCM Trading Station Desktop platform (not to be confused with the lighter, web-based version). We can login with a Demo account and have access to free, reliable pricing data.

Once we are inside the platform, open up the Marketscope charting window. Click on File, then Create Chart…

Learn Forex: Creating a Historical Chart on Trading Station Desktop

Backtesting 101 - Test Drive Your Strategy Before Investing Real Money

(Created using Marketscope 2.0 Charting Platform)

Inside the Create Chart screen, we want to select the Period size that our strategy requires and select the Data Range “Other.” Checking the Date from and Date to boxes then allows us to select the exact dates and times we want the data to come from. Many pairs and time frames can go all the way back to the early 2000’s, which is great considering this data is completely free. You can create more charts by going through the same process multiple times. This is all the data we could hope for.

Create a Trading Plan

The next step is to figure out the strategy we are wanting to backtest. Many of you reading might already have an idea of what rules you follow and how you plan to get into and out of trades. If you do, you can skip this step. If you do not have a strategy, here are a few good strategies you can learn and develop:

The 3 Step Double Top Strategy

Trading with RSI

Trading with CCI

(Make sure to check out James Stanley’s “How to Build a Trading Strategy Series” if you get stuck.)

Things we want to emphasize are the conditions and rules we will follow when entering a trade and when exiting a trade. It’s important to lay out a detailed trading plan before we begin testing, that way we end up with reliable data to make an educated decision on whether or not we should trade the strategy with real money. Write the entire strategy out on paper so we can refer to it later when we are backtesting. Make note of chart time frames, indicator parameters, stop/limit levels, and exit logic.

Manually Backtest Strategy, Record Results

The final and most enjoyable step (for me anyway) is testing the strategy on historical data. Create a chart using the steps laid out above for a random Data Range in the past with our preferred period size, then slowly scroll forward on the chart using the right-arrow key on our keyboard. Each time we click forward, the chart should move forward one candle. This simulates watching the market in real time. So we can look for entries that follow our strategy, but don’t have to wait hours, days, or weeks for them to develop. This saves us loads of time.

It’s important to keep good records of these simulated trades and make notes of when our strategy buys and sells. This is very similar to creating a trading journal. I prefer excel so I can organize entry and exit time and prices and quickly calculate my strategy’s P/L. Our goal is to follow our strategy diligently and honestly (no peeking at future prices before deciding to trade, etc). We want to create good data.

50-100 trades is a decent starting point before we begin thinking about taking a strategy live. Remember though, that just because a strategy has worked well in the past, does not guarantee that it will continue to work well in the future. Only trade with risk capital, and don’t overleverage your account.

Searching for Successful Strategies

Trading is hard, but it’s nice to be able to “try” a strategy before we “buy.” Using the methods above can save you both time and money, putting yourself that much closer to being a successful Forex trader. If you have any questions or comments, feel free to write me. Also, be sure to sign up for my email list.

Good trading!