Escon deOjo's Forex

Any source of fx trading info will tell you you will need to test a foreign exchange system before you go live but how precisely are you able to do that? The reality is that you should do it in more than one way.

Back Testing

Back testing a forex system involves scrolling thru the historical charts looking for eventualities that would have triggered a trade under your system and recording what would have happened if you had opened a trade at that point. Historical charts are supplied free on many currency trading info websites.

It is vital to apply the guidelines of your system in a pragmatic way when back testing. So for instance, if you are using an EMA crossover system, you may spot a crossover on a past chart that was followed by a 2 hundred pip rise. Do you write down that you would have made 2 hundred pips from that trade?

No, it is probably not realistic. First you may have spent a minute or two checking the signal against other time periods or other signals. Most systems require you to do that. In that time the price could have modified.

Then you have got to think about where your stop loss would be and whether there were any fluctuations that would have triggered your stop-loss. If there were, you need to record a loss although there had been doubtless a 2 hundred pip profit.

Ultimately, consider where you would have closed the trade. If your system aims for one hundred pips profit per trade, you would have closed at this point and missed out on the rest of the price movement. If your system involves closing half of a successful trade, you may work out what your exact profit would’ve been, applying that method.