Ultimate Guide To BACKTESTING - How & Why You Should Do It!

Summary

This video emphasizes the importance of backtesting in trading, particularly to build confidence and improve performance. The presenter discusses how backtesting helps traders refine their strategies, gain market experience, and avoid mistakes that stem from a lack of confidence. Key elements for successful backtesting include a trading strategy, a structured approach to organizing data, and using dedicated backtesting platforms. While backtesting cannot solve all trading issues, especially psychological ones, it provides valuable insights into the viability of a system. The video also recommends using Forex Tester 5 for its realistic simulation and data collection capabilities.

Takeaways

• 😀 Backtesting is the process of going through past market data and simulating trades to test the effectiveness of a strategy.
• 😀 Backtesting helps build confidence and market experience by allowing you to see how your strategy performs in real-world scenarios.
• 😀 Confidence is a key factor in trading success, and backtesting is one of the best ways to develop it.
• 😀 Backtesting is like practice for a professional—repetition helps you refine skills and understand market behavior.
• 😀 If you lack confidence in your strategy, backtesting can help remedy that by allowing you to see your strategy’s past success.
• 😀 While backtesting is vital, it does not replace other essential aspects of trading, such as risk management, psychology, and technical analysis.
• 😀 To backtest effectively, you need a trading plan, a folder structure for notes/screenshots, and a backtesting platform (preferably a paid one like Forex Tester 5).
• 😀 A trading plan for backtesting doesn’t need to be as detailed as your live plan, but it should include risk management and clear strategy rules.
• 😀 Backtesting platforms, such as Forex Tester 5, streamline the process by automatically tracking data and risk management, saving you time and effort.
• 😀 After each backtest, you should review the trade results, save charts, and analyze your performance to refine your strategy before going live.
• 😀 Backtesting is not a quick fix but a long-term investment that helps you improve your strategy, gain market experience, and prepare for live trading.

Q & A

What is back testing and why is it important in trading?

Back testing is the process of going through past market data and trading it as if it were a live situation. It helps traders evaluate the viability of their strategy and build confidence in their system by simulating real market conditions without real money involved.

How does back testing help improve a trader’s confidence?

Back testing allows traders to see how their strategies would have performed in the past, which builds confidence in their ability to apply the same strategy in live markets. It also helps traders gain experience and reduce emotional hesitation when executing trades.

Why is a lack of confidence detrimental to trading?

Without confidence, traders may hesitate to follow their strategies or prematurely close trades at a loss, which could have turned into a winner. This can prevent traders from achieving consistent success even with a sound strategy.

What tools and resources are needed for back testing?

To back test effectively, traders need a solid trading strategy and a written trading plan, a system for organizing and saving notes or screenshots (such as Notion or folder structures), and a back testing platform like Forex Tester 5 or TradingView’s bar replay tool.

What are the main components of a back testing plan?

A back testing plan should outline your risk management (e.g., risking 0.5-1% per trade), your trading strategy (such as identifying market trends and using supply/demand zones), and a repeatable system to follow for each trade.

What role does psychology play in trading, and why can't back testing solve it?

While back testing helps refine technical aspects of a trading strategy, it doesn’t address the psychological challenges of trading, such as fear or greed. Traders need to work on their mindset separately to manage emotions during live trading.

What is the advantage of using a back testing platform like Forex Tester 5?

Forex Tester 5 offers a realistic, simulated trading environment, allowing traders to test their strategies with built-in risk management tools and detailed statistics. It also tracks important metrics like win rates and profit per trade, which helps refine strategies and build confidence.

How does Forex Tester 5 help with risk management during back testing?

Forex Tester 5 includes built-in risk management features, such as position sizing and stop-loss calculations. This makes the back testing process more accurate and less time-consuming compared to manually calculating risk on other platforms.

What information does Forex Tester 5 provide after completing a back test?

Forex Tester 5 provides a trade history with details like entry and exit points, profit/loss for each trade, and performance statistics such as win rate, average trade size, and expected monthly/weekly returns.

Why should traders save screenshots and notes during back testing?

Saving screenshots and notes helps traders visually review their trades later. This can reveal patterns and insights into both successful and unsuccessful trades, making it easier to refine the strategy before applying it in live markets.