Direct from the desk of Dane Williams.
Testing your forex strategy is simply doing the due diligence required to be consistently profitable.
Without any sort of testing, you might have the greatest looking strategy in the world but…
Does it make money?
Testing your forex strategy is the crucial step that separates a truly prepared trader from one who is rushing into things and destined to lose money.
With that in mind, let's explore why the strategy testing phase is key to successful forex trading.
So first up, we've got backtesting.
This is your forex strategy's initial trial run, using historical data from your markets of choice.
What you do is feed your strategy with past market data and see how it would have performed.
A simulation of how your strategy would have performed if you had traded it across any past period of time.
It’s not the best because you’re able to cherry pick certain historical market conditions that may or may not be the same as what is to come.
But the goal here is to just spot any super obvious flaws, tweak your strategy and make sure it stands up to the challenges that you know have come before.
Moving on, we've got forward testing.
Now that your strategy has passed the back test, it's time to see if it's got the chops for the present.
Forward testing involves executing your strategy in real time, with simulated trades.
Now you may remember that I’m extremely critical of forex demo accounts due to the fact they don’t teach you the skills required to overcome the psychological challenges of losing (or winning), money.
But I’ll leave it up to you whether you want to forward test your strategy using a demo or trading live 0.01 lots.
This type of testing helps you gauge how well both you and your strategy can adapt to live market conditions.
Think of it as you taking your first steps on the bridge between theory and reality.
Now, let's talk live testing.
This is the moment of truth where your strategy faces real market conditions, real risks and there are real rewards on offer.
I’d recommend starting small and certainly not going all in by trading standard forex lots immediately.
As you get used to things, monitor how your trading strategy performs and continue to track performance as is, rather than making adjustments on the fly.
Even though you’re trading live, remember this is still testing.
As you start to watch your profit and loss move, emotions are going to run high during live testing, so stay disciplined and stick to your plan.
Now we’ve come this far, I want to just leave you with some final tips on testing your forex strategy.
First, be patient.
Rome wasn't built in a day and neither is a consistently profitable trading strategy that fits seamlessly with your style and personality.
Take your time through each testing phase, but don’t chop and change as you go.
Commit to testing a strategy and see it through.
Second, I’d encourage you to keep meticulous records of what exactly you’re testing.
Every trade, every setup, every set of market conditions, jot it all down.
Use this trading diary as a valuable tool for refining and enhancing your strategy after all of your testing is complete.
So as you can see, testing your forex strategy is a crucial step in becoming a consistently profitable trader.
Backtesting, forward testing and finally live testing, each play their part in refining and perfecting your approach.
Be patient, keep detailed records and stay true to your strategy until the entire testing process is complete.
And remember, it's not about developing a trading strategy that avoids losses altogether.
Just one that manages them wisely as part of the bigger picture.
Best of probabilities to you.