The Simple Way to Test Forex Systems
Anybody who has been round the forex market for more than two minutes knows that you always have to test foreign exchange systems before you go live with them. Even if the system includes guarantees, even if you got it from a top trader who makes millions with it, you’ve got to know that it’ll work for you.
So why do systems like Forex Twister work for some folks and not others? Many people actually find this quite difficult to believe. They imagine there’s one perfect system out there that fits everybody and could make us all into millionaires if only we knew how it’s possible to get a hold of it. But that idea is a complete fantasy.
There are several reasons why a system might suit some folks and not others. It could involve some skill such as interpreting a complicated mix of indicators that some people will handle with no trouble while others cannot get their heads around it no matter how hard they try. It might be to do with risk : the system could involve going to a quantity of risk which would be way outside some people’s’s comfort sections, leading them to either subvert the system or mess up due to the level of stress.
So you do need to test and you can do this in more than one way. The best option is to perform at least two types of testing which you can do at the same time.
First you may use backtesting. Here you take your system and work out on paper how well it would have done on the recent historic market, i.e. The last half a year or whatever period you select. This does not take too much time because you can quickly scroll through historical charts searching for the signals that would have led you to make a trade if you had been operating your system live at that point.
Backtesting should give you an idea of whether a system has potential. Of course the market is not going to copy in precisely the same way so you do need to take into consideration the indisputable fact that you could have struck lucky or unfortunate and picked a point when the system performed abnormally well or badly.
For that reason, it is best to backtest over the longest possible time and maybe split your tests so that rather than testing, for example, one entire year when the market might have been particularly strong or weak, take the first quarter of year one, quarter 2 of year two, etc so that you test one 3-month period from every year of four years. This gives you a good period spread without requiring you to cover four whole years.
The second way to test forex systems is in a demo account. Here you are working with the live market but not using real money. This technique is slower because you have got to wait for your signals to come up for real . On the other hand, it emulates real live trading techniques with the chance of slippage and other things which are not gong to turn up in back testing.
Remember that you can test many systems at the same time in a demo account, provided you keep separate records of their performance. Or you can use several demo accounts. In this way you’ve got a better chance of ending up with 1 rewarding system at the end of your period of testing.
Forex demo accounts also have the edge that you are developing your live trading skills and familiarity with a software platform and charting service at the same time as you are running your tests. This gives you solid real time coaching to prepare you for the present when you go live with real money. Most currency exchange brokers will supply free demo accounts which you can use to check currency exchange systems.
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