Backtesting is important yet often neglected approach used by traders to confirm that the forex robot they intend to integrate into their trading system actually does what it claims to deliver. Despite the fact that many experienced forex traders and coaches strictly suggest the back testing use, most traders hardly test their strategies.
Generally, they choose to follow what they are instructed by the EA seller or in certain cases they will first test the robot on their demo accounts and then move to the live trading. In this article, we’ll find out is backtesting important for forex EAs?
What is Backtesting?
Backtesting is a technique that helps forex traders to confirm that whether their chosen best forex expert advisors are capable of doing the tasks they are supposed to do. Obviously, your trading strategy will go down the drain if it can’t perform or deliver your desired results. This is where backtesting come to your salvage.
Why It’s Important to Backtest Your Forex EAs?
Technically, backtesting refers to the methodology in which you insert a set of past data and examine how your selected forex robot would have responded against the real data. Here, your forex trading system will have specific strategies handy, so by inserting precise historical data and then assessing which particular trades your system would have suggested is one way to see the practicability of your strategy.
In addition to that, by backtesting your forex robot you would be able to identify flaws or weaknesses in your trading strategy and get a better idea about how your selected robot picks the most profitable opportunities and place trades.
Another significant benefit of backtesting your selected EA is that it gives you great insight into how your trading system is going to respond against market fluctuations and price actions. By backtesting your robot, you can quickly observe whether your preferred strategy is precisely picking currency pairs that would have delivered greater profit margins and if it’s selecting pairs outside your risk tolerance.
If at any backtesting stage, you feel that the things aren’t going the way you were expected them to be, you can adjust your system’s parameters and upgrade its performance to match up with your particular trading style. Then check modified settings through your backtesting mechanism to see if you’re getting better results.
Is Backtesting an Ultimate Solution?
There is no denying the fact that backtesting gives traders freedom and flexibility to adjust their system’s settings in order to achieve desired results. However, it’s also important to understand that it’s not an only solution to assess the performance of your selected forex robot.
Also, forex backtesting can be a time-consuming process and experienced traders suggest that one should not depend on it. Why? Because relying massively on backtesting can be truly devastating especially if traders are not completely aware of the boundaries linked to the simulated outcomes.
It’s Useful, but don’t rely on it
Data interpretation is just a small segment of the trading game. Interpreting data doesn’t get the trader ready for the psychological or emotional behavior of placing trades. This is usually the most difficult thing for traders to beat. As backtesting doesn’t take the psychological or emotional factors into consideration, it would be difficult for the traders to cope up with these aspects alone. Handling a losing trade, controlling your greed or excitement in case of winning trades are things that cannot be replicated by backtesting.
They Help in Analyzing the Past
Forex market is highly volatile and uncertain and its conditions constantly change in one way or the other. Things that have impacted the market previously have no importance in today’s trading activity. In addition to that, new factors like volume and interest may develop new conditions for the forex market behavior. Professional traders consider it a mere waste of time to test a trading strategy on market behavior that happened, say, a year ago.
Problem is, New Robots Use Live Data Which Makes Backtests Less Reliable
Another problem associated with forex backtesting is that the present-day forex EAs use live data which makes it difficult for the trader to backtest their trading strategies. Even if they manage to backtest their strategies, the result will always be questionable.
Focus More on Live / Demo Results for Proof and You Will Be Happier!
While backtesting is a great way to play safe, there are various elements where demo trading proves to be a better choice.
Although live/demo results are believed to be not as elaborate as backtesting, they still provide a way to check the prospective performance of your EA.
In conclusion, you can always use backtesting strategy if you’re able to focus on other areas by yourself. Keep in mind, forex is a diversified field and you have to constantly work hard to achieve results as there are no shortcuts at all.