Currency Trading Information Channel
5 Questions You Need To Have Answered Before You Back-Test Your Forex System
As 90-95% of new forex traders lose money within the first 3-6 months this article helps to guide new forex traders by asking 5 questions that the forex trader needs to know prior to back-testing their forex system.
Let us jump right in...
1. What data type are you using (or going to use)?
I know this sounds strange, especially if you have experience from another market such as stocks as their generally is only one type of data source available. However, in the forex market you can have up to 4 different data types: bid, ask, mid and indicative. Each have their own little nuances.
If you would like to know more about the data types then visit the article written about the perils of indicative prices. As this will save me from having to repeat the information again and boring those who've already read it.
So, if you know you have indicative prices then you know you're in for some good results! However, if you have any of the other three you need to be careful on how stop and limit orders are placed.
As an example: If we had bid price history and we were looking to place a buy entry stop at 0830 EST according to the day's high, then we know that the bid price will not accurately reflect what the actual price of our order should be. You would have noticed that if you placed a buy entry stop at the exact same price as that of the day's high you would have entered prematurely - you would have entered 4 or 5 pips before the high or the low of the day was touched (the exact same amount as the spread your broker offers!).
This leads me into the next most important question...
2. What spread is your broker offering on the currencies you are bask-testing?
You need to know this as this can help you set your slippage settings on each currency.
As our example in question 1 pointed out. We found that our buy at the day's high method did not exactly work because we bought at the BID PRICE high, not the ASK PRICE high - the price that we need when we place our order TO BUY.
Therefore, we enter in a slippage setting representing the spread that would be exhibited by this trade on this currency.
But knowing at what price to buy is only half the problem... how do we know what quantity to buy?
3. What margin does your broker offer?
If we know at what price to buy our currency at we need to inform our broker on what quantity to buy to fulfill the order. We only know what quantity to buy by the margin that the brokerage firm offers.
Most brokerage firms offer 100:1 leverage, however, some firms offer mini accounts with 200:1 leverage, others only 50:1 leverage.
Find out the margin required.
4. What restrictions does your broker impose?
Now, I don't just mean margin and spread restrictions as I have mentioned above. These are important in their own right, what you need to find out are the details.
This is probably the most important question of all as the fine line between success and failure can be found in the details. Now you can have this questioned by one of two ways: 1. You can find out through experience (generally the most expensive way unless done through the demo account!); or 2. You ask your broker (the cheapest and best way).
Why is this so important? I hear you ask. Well let's say you have a system that trades any gaps that might form on Sunday at 1700 EST, but your broker does not open until 1730 EST. You either need to factor this restriction in to your system, or move onto another system completely. Or, you may have a system that has 10 pip stops, but you find out that your broker will only let you place 15 pip stops from your initial entry price. Once again you will need to change your system to see whether it still performs well, or throw out your system (or change your broker)!
In fact one of the most devastating restrictions imposed by FXCM is that they do not accept stop entry orders if price never happens to trade at your entry stop price! FXCM will honor and "take the loss" of your OPEN stop positions, but if the liquidity is not there and price has shot straight through your stop price then you will miss out. This can have disastrous effects on your system results as you are left wondering on trades where you made good returns - "Would FXCM have got me in?". You may want to read of some of the quirks I use when placing entry stop orders on FXCM that could be of huge benefit to you to help you possibly get around this problem.
The restrictions by your broker are only half your systems' success, you also need to find out about another more important restriction... yourself. This leads me to the final point...
5. What restrictions do you have?
This is a vitally important question. Most people test their systems and fall in love with the results but find when they trade their system they have lost their account and that most of the best signals occurred while they were sound asleep!
As the forex market is a 24 hour market, you need to put into place restrictions in your system that will be realisticly conducted by you during the course of a normal trading day. There is no use operating a trailing stop method that changes your stop points during times when you are asleep and cannot possibly do so.
I hope this article has made you aware of some of the important things that need to be known prior to testing your system.
Article written by Ryan Sheehy from Currency Secrets.com. Where you will find reviews on forex data vendors, signal providers, brokers, and popular forex resources, along with more quality articles... all for f*ree!
MORE RESOURCES updated Sat. December / 14 / 2019
Stories of have-a-go forex trading heroes belie a quiet market Financial Times
Banks face fresh collective action over forex manipulation Financial Times
Arnold Staloff, 74, Philadelphia currency trader and innovator The Philadelphia Inquirer
The Best 5 Tips for Forex Trading Beginners - VENTS Magazine
Forget forex trading. I think this is a much easier way to make big money in the financial markets - Motley Fool UK
Forget forex trading. I think this is a much easier way to make big money in the financial markets Motley Fool UK
All You Need to Know about Automated Forex Trading Robotics and Automation News
Learn how to do responsible Forex trading MENAFN.COM
Forest Hill stockbroker convicted for bogus currency trading scheme Queens Daily Eagle
Trump complained about the US dollar's strength throughout 2019 — but these 8 major currencies were even stronger - Business Insider Australia
Trump complained about the US dollar's strength throughout 2019 — but these 8 major currencies were even stronger Business Insider Australia
Brexit Once Meant a Weaker British Pound, but Not Anymore The New York Times
China Drops Below Canada as Currency Trading Plunges by 12.3% The Epoch Times
Central bank trades prompted rival FX traders to share info Financial Times
Cryptocurrency Glossary: Using Forex Trading Concepts to Invest in Digital Currencies - Captain Altcoin
Cryptocurrency Glossary: Using Forex Trading Concepts to Invest in Digital Currencies Captain Altcoin
Managing Emotions in Forex Trading Finance Magnates
Forex trading on mobile apps in India Daily Pioneer
Currency Traders Near End of a Dismal Decade Yahoo Finance
Currency trading floors seem to have glass ceilings for women looking to move into management - The National
Currency trading floors seem to have glass ceilings for women looking to move into management The National
USD/CHF IG Client Sentiment: Our data shows traders are now at their most net-long USD/CHF since Jun 26 when USD/CHF traded near 0.98. - DailyFX
USD/CHF IG Client Sentiment: Our data shows traders are now at their most net-long USD/CHF since Jun 26 when USD/CHF traded near 0.98. DailyFX
How the pound’s exchange rate after the UK election will affect you Yahoo Finance UK
What you need to know about forex trading in Nigeria Daily Post Nigeria
Key factors impacting global forex trading Global Banking And Finance Review
Use of Smartphone for Forex Trading in India Industry Global News 24
Foreign Currency Exchange Software Market to Witness an Outstanding Growth During 2019 | Conotoxia, Banking Circle Real-time FX, CEIFX, AFEXDirect, Broadridge FX, Biz4x & More - Galus Australis
Foreign Currency Exchange Software Market to Witness an Outstanding Growth During 2019 | Conotoxia, Banking Circle Real-time FX, CEIFX, AFEXDirect, Broadridge FX, Biz4x & More Galus Australis
GBPUSD trades to new session lows ForexLive
NZD/USD Tests Resistance Cluster Action Forex
Despite Brexit, London is Tightening Its Grip on Digital Trading Business 2 Community
Ion Group buys currency software supplier MarketFactory Financial Times
Forex Trading for Beginners Yahoo Finance
US Open – Brexit is Coming, Trade Progress, Dollar tumbles, Oil rises, Gold’s resilience - MarketPulse
US Open – Brexit is Coming, Trade Progress, Dollar tumbles, Oil rises, Gold’s resilience MarketPulse
EURUSD to Remain Indecisive While Between These Two Levels Daily Price Action
Euro Currency Breakout? Gold Bulls Sure Hope So! See It Market
Pound Surges on Johnson's Victory DailyForex.com
What Is Forex Trading and How Does it Work? - RushPRnews.com
USD/JPY Forex Signal DailyForex.com
Top 5 Reasons Why You Should Start Forex Trading Business Review
How to Invest in Forex | The Smarter Investor U.S. News & World Report
AUD/USD Forecast: AUD Facing Serious Challenge Above DailyForex.com
How To Start Out In Forex Trading Latin Post
Top 8 Mobile Apps for Forex Trading Techzone360
The forex trading strategy basics ForexLive
Retail forex trading set to go live today Economic Times
How Does Forex Trading Work? FinSMEs