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Wednesday, 08 October 2008 23:20 |
Forex backtesting is essential in developing a successful trading system. A trader who lacks the discipline to carefully and consistently backtest his or her system will never establish a Profitable system. The following are vital backtesting strategies:- Check and double-check your historical data before starting your backtesting process: make sure it represents realistic trading scenarios that coincide with what your system is built for.
- Your historical data should go back only through the latest bull market because you won’t know how your system will perform in a bear market.
- Use data that wasn’t used to construct your original system. Otherwise, your results would already match the results of your system’s strategy.
- If you specialize in specific currency pairs, it is important that your data fully covers those pairs. However, it is best to use as much test data as possible in order to increase your flexibility in currency pairs.
- In your historical data, be sure it reflects positive and negative world conditions—it is important to know that your system can handle these affects.
- Your data motels should allow a realistic amount of slippage.
- Capital management should be part of your backtesting strategy.
- Most importantly, remember to remain skeptical at all times: if your results tell you your strategy is fail-proof, remember that nothing is ever fail-proof.
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