When learning how to trade the financial markets, you need to learn a strategy or two to get started, most will find something off the internet or pay for one. The issue then is how good is that strategy and probably more importantly could you actually employ that strategy to profitable effect. Reading and knowing the rules is one thing but actually implementing them in a live market is another thing entirely. So it would make sense to be able to learn the strategy and how to implement it in an environment that is less testing in the first instance. Once you have learnt the strategy and how to use it then wouldn’t it be a good idea to find out how effective it is in different market conditions. In other words try and ascertain if you actually have what is termed as an Edge. An edge is knowing that over an X number of trades you will be profitable. You only need to be profitable 51% of the time to be profitable if you control your risk. Once you have a proven edge, wouldn’t it be good to be able to improve it. If you could improve your edge to around 60:40 win loss ratio then you would would have a significant edge on the market. This can also be done off line by back testing.
Back testing is always a topic of debate amongst traders, the key thing is to back test intelligently. So if you are only able to trade a particular session then only test your strategy using that session’s data and so on. In other words back test like you would trade normally, so if you use Multi-Time Frame Analysis, Supply and Demand, Resistance & Support, Moving Averages, Candlestick Patterns, certain indicators then back test using them etc. As you take trades, write down what you observe and learn. The best software to do all the above is called Forex Tester and I wrote a previous piece on my website here:
In a previous post I also wrote about the 50 Trade Challenge, I would challenge you to actually take 100 or even 500 trades back testing before using your strategy in the live markets. Why? So that you can gain a better understanding of how to implement the strategy to best effect, may be even improve and make it your own, in fact really ‘owning’ a strategy will help you. Plus, what market conditions and times and on what currency pairs does it work best, I could go on but you get the idea. You are building up information and knowledge and will also gain market experience. More importantly, you will gain confidence in your strategy and will use it without hesitation, if the right market conditions show themselves. So you are also working on your personal Trading Psychology which is often the biggest hurdle for traders to overcome. Additionally you will also be speeding up your ‘Learning To Trade’ process.
Forex Tester has been updated significantly and now you can actually import MT4 indicators and EAs or even develop your own. There are over 700+ Financial instruments to choose from. You can calculate your risk based position sizes in one click. Historical news events are now included on the charts as if in real time. You can download a free trial software and you can also export your test data too. Plus there are videos which explain exactly how to use and get the best out of this brilliant bit of kit. If you already have Forex Tester then you can upgrade for a reduced rate.
If you want to establish your edge and/or sharpen it then I highly recommend intelligent back testing, using Forex Tester.
Finally one of my trading mentors used to make me take at least 500 trades in Forex Tester for each and every strategy they taught. Just remember the old wise saying that:
‘The Master has failed more times than the student has even tried’.