Forex backtesting is the process of going through charts from previous years, weeks or days to confirm the effectivity of a system. Simply put, you look at past charts to know if your system worked well as you predicted or failed. Every new and experienced forex trader do backtesting because it allows the trader to gain knowledge and confidence on his system and make necessary tweaks and rule to find the system that works for them.
Forex Backtesting Software
Most forex companies will let you view at past charts or even download them, where you can mark (using pencil and paper) and trade by looking at one bar at a time (simulating a real trade session).
There are some software that will do this for you. One is forex tester. Well, I think, its the only back testing software out there. Either the forex brokerage company has a feature or not, you can either trade manually or demo trading. Demo trading can be long and tiresome. Using a back testing software, you can instantly test your strategy because you can control the time when each bar will appear.
Conclusion: Whatever method you take, always remember to test your strategy before trading live. Either by backtesting, paper trading or demo trading. You must gain full confidence on your trading system.