Backtesting And Its Benefits

Backtesting And Its Benefits - Trading Dispatch

Often in a trader’s journey, people may become bored and lazy to the point where they don’t focus on the finer details of their strategies. It’s even worse for the traders just starting, because many believe that profits will come immediately without going through the learning process and failing time and time again.

For consistent profitability to be reached, a trader should focus on the pair(s) that work for their strategy and understand what works best for them. Therefore it is vital for a trader to undergo a period of backtesting, whether it is while they are live trading or still in the beginning stages of learning how to trade Forex.

What is backtesting?

Let us get into what backtesting is. Backtesting is the process of trading using historical data (charts) to test a strategy.

This process allows you to go back in time to determine where your strategy worked and where it may not have.

The backtesting process cannot be 100% accurate for what is to come in the future because, going forward, market conditions aren’t factored in when trading your strategy.

Forex traders must remember not to take these results as absolute truths. Backtesting is meant to give the Forex trader a sense of confidence in his or her trading strategy and ability to execute trades whenever they present themselves.

When a Forex trader jumps into the markets blindly without much prior knowledge about the strategy they trade, they open themselves up to a lot of loss and heartache.

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The Benefits Of Backtesting

I am not saying this is the only way a Forex trader can succeed in the markets, I am saying this will help along the journey. Although backtesting may take time with the pairs and years you choose, it will save you a lot of time and money in the future.

Benefit 1

Back-testing will save you time in the long run – If you are live trading only, the lessons you need to learn will take a long time to surface. Meanwhile, if you backtest, this speeds up the entire process and empowers you to learn faster.

Also, if the strategy doesn’t work, you can spot that sooner rather than wasting more time. Next, you can focus your attention on building a new system.

Benefit 2

It will save you the money – Because you are backtesting the strategy, you won’t rush into making decisions without knowing that your trading strategy has an edge. When you stay away from the battle, in order to prepare, you don’t lose your soldiers (capital).

Benefit number 3

You become more acquainted with your own trading strategy and look at new creative ways to improve and increase the edge. Your approach will become more second nature to you, which increases confidence and your ability to spot opportunities.  

So at the end of the day, backtesting your strategy will only serve you and your soldiers (capital) when you put them on the battlefield. Focus on your strategy, cut the losses, and enlarge the profits.

If you are ready to start backtesting, you have a couple of good options – You can do this for free on the MetaTrader platform. And I also highly suggest checking out TradingView, who offer plans that include backtesting functionality, as well as a number of added bonuses like great charting tools and the ability to share with other traders.  

Happy Trading fellow traders!

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Emmanuel Maphosa

Emmanuel Maphosa

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