Having fun trading so far? I hope so! Trading can be a very good intellectual challenge to some people. I personally find excitement when I get a good position in the market. But as you might have notice, that is a very bad way to trade. We must have no emotions at all. But people are people and we should strive to master our emotions. Everyone is a work in progress.
Speaking of work in progress. A forex trading system is never complete. As the market is never permanent. If the market behaves the same way as they behave 20 years ago, all generations of previous pioneer traders would have got all the money in the market and there will not be enough money for new comers. The truth is, the market changes. A few decades ago, a well known trader could be killing the market and today, he might have descended into the shadows because his system does not work anymore. Or probably teaching instead of trading.
Does Your Forex Trading System Still Works?
Our lesson for today is for us to know if our system still works. How would you know if you’re still using a profitable system? How would you know if you still need to trust this system thru good and bad?
This is called forex backtesting. And there are different ways to do this.
#1 – Paper Trading
Paper trading is the act of testing your forex trading system by looking at the charts, waiting for your rules and setups to happen and opening your trade by writing your trade down (market, price of entry and exit) in a piece of paper. You will do this for 1 year and then you will have to look back at those papers to see if the trades prove to be profitable for you.
This way of testing is very cumbersome and takes a lot of hardwork and time.
Paper trading used to be popular when online trading is not yet popular, today, to test your forex trading system, most people resort to #2.
#2 – Demo Trading
Demo trading is trading forex in an environment that looks the same as a live trading account, only difference is, the money is not real. I think this kind of trading is good for people who are just starting out. But since you also have to wait for your setups (hours, days, weeks or months) to happen, it can be quite as cumbersome as paper trading. Or you might forget you are waiting for something.
You may create a forex demo trading account on any forex brokers. We have a list of reputable forex brokers to choose from.
But don’t worry, there is actually another option which I think is the best.
#3 – Forex Tester Software
Forex tester is a software in which you can test your forex trading system, using virtual or fake money, in a trading environment that looks like a live account AND you don’t have to wait for days for the setup.
In using forex tester softwares, all data will be imported into the software and you can choose which year you want to trade in, 2001 – 2012 for example and the software will simulate the data accurately for those years and you can trade your system. The good thing about these softwares is that you don’t have to wait, you can speed up or slow down the time in which candle sticks are formed. And I think this kind of testing is the best because you can save a lot of time. There is one small catch, they are not free. But I think they are good investment. I personally have a forex tester to test my system and I couldn’t count the number of times I thought I was using a good system until I tested it in a forex tester. It saved me a lot of time. Months time.
Here’s the link for the forex tester I’m using.
Assignment
- See if your developed system works for the past year from 2009 – 2011. Does it work? What tweaks can you do to maximize your profit?
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