Before computers were a thing, traders used to draw their charts by hand. Munehisa Homma is famous for using Japanese Candlesticks to backtest and successfully trade what many consider the first futures market in the world, the Dojima Rice Exchange of Osaka.

Fast forward to today, and manual backtesting is still one of the best ways to learn how to trade, and computers have allowed us to speed up the process.

In this post, I'll show you why manual backtesting is so useful, what to look for in the best manual Forex backtesting software, and my top 3 picks for the best software available right now.

Why Manual Backtesting Software is an Essential Trading Tool

Many new traders think that backtesting software is only for automated trading strategies.

Nothing could be further from the truth.

Manual backtesting software is a vital tool for the manual/discretionary trader. I also firmly believe that manual backtesting is the best place for most people to start, when building automated strategies. 

There are some trading rules that cannot be easily programmed into a computer.

So if you start with manual backtesting, you can develop any type of trading strategy.

With a fully automated trading strategy, you're limited by the capabilities of the programming language or platform.

When you find a strategy that's profitable in manual testing, then you can figure out ways to automate parts of the strategy. Sometimes it's even possible to automate the whole thing.

…or maybe you just want to stick to manual trading.

That's great too.

The key is that you have a choice, when you start developing with manual backtesting software.

Manual backtesting also allows you to get to know a trading strategy very well. 

Like going on a date with the same person many times, you really get to know the quirks, strengths and annoying things about a trading system.

When you do automated backtesting, it can be very easy to miss these things because you don't see the result of every trade. You start the test, let it run, then you check the results.

Finally, manual backtesting can be used as a simulator to help you practice an existing trading strategy.

This is similar to how pilots practice flying in a flight simulator.

Just because you have a trading strategy that already works, does not mean that you can just sit back and relax.

Professional basketball players practice free throws all the time. It's a seemingly routine skill, but if they don't practice, they will get worse.

If you don't practice, you'll start to lose your edge too.

Now that you understand the benefits of manual backtesting software, let's look at the components of a great software package.

What to Look for in Manual Forex Backtesting Software

These are the criteria that I used to pick the backtesting software I recommend.

• Ease of use
• Cost
• Historical data
• Analytics

Figure out which features matter the most to you and choose accordingly.

Ease of Use

The first feature I look for is how easy is it to use.

Most software packages work in a similar way. They look like trading platforms and act like trading platforms.

Once in awhile, some software developers try to get too creative and things get weird. But for the most part, most software will look similar and is usually easy to use.

But keep an eye out for for features that streamline the backtesting process.

Manually entering trades is tedious. Any functions that speeds up this process is worth its weight in gold.

The Cost of Manual Forex Backtesting Software

This is a consideration for many traders, so I've chosen software that's affordable, but still has the features that you would need to do a professional backtest.

The price of manual Forex backtesting software starts at about $100 and can cost as much as $500. This is just for the software itself. 

High quality historical data can cost anywhere from a few hundred dollars per market, to a few thousand dollars. Data subscription plans generally start at about $30 per month.

So it's very important to figure out what kind of data a software package includes, before buying it. 

You could be in for a surprise, if there's little to no data available in a software package and you have to pay a lot more to get the data you need to test.

Data Available

That brings us to historical data.

Companies take different approaches to providing data. Some are generous, while others will charge you for every option.

Each approach has its benefits and downsides.

Services that cost more will generally have more data points and provide cleaner data. Their data is also usually more up to date. 

If you need the best data then this is the way to go.

This is especially true if you're backtesting strategies on lower timeframes. The quality of the data matters much more because there is less margin for error.

Cheaper data will usually have fewer timeframes available and the data might not be as recent. But this is a great option if you're only backtesting higher timeframes like the daily chart or the 4 -hour. 

Again, figure out what you need.

The most expensive option is not always the best.

Analytics

This is the biggest weakness in most of the backtesting products I've used.

There was a web app back in the day called Tradingrex which got me really excited because they provided legit reporting, basically for free. Unfortunately, they weren't able to make any money and folded.

But it's really hard to find detailed analytics in manual backtesting software. Pretty much all software will give you win/loss percentage, win/loss ratio, max drawdown and number of winning/losing trade in a row.

The bare bones stuff.

However, there are some metrics that can lead to big breakthroughs in the development of a strategy.

Things like MFE/MAE, Monte Carlo Simulations and monthly/yearly performance breakdowns are simply not available in most manual backtesting packages.

So if you can find a software package with excellent analytics, that is usually going to be the differentiating factor.

My Picks for the Best Forex Backtesting Software

Here are my picks for the top 3 best software packages on the market.

I'll give you the pros and cons of each, so you can make an informed decision.

Hint: My #1 pick is at the bottom.

3. Soft4FX

I'll just come out and say it…

If you're on a very tight budget, then Soft4FX is a good place to start.

Otherwise, you're better off with the other options on this list.

However, I think it's fantastic that a product like this exists, because it gives traders options. It also creates competition, which usually makes all products in the space better.

There are also a couple of really good reasons to use Soft4FX as a secondary backtesting option.

Pros

• Add-on to MetaTrader 4 and 5
• The ability to upload your own historical data
• Very affordable price
• Can be used with 2 MetaTrader accounts and can be transferred
• Pay once, no ongoing fees
• Free data from 1 source

Cons

• Clunky interface
• Only 1 data source available in the software, you have to upload other sources
• Minimal reporting and analytics available
• Only available for Windows
• Have to export data into Excel to get advanced analytics

Final Thoughts on Soft4FX

Realistically, if you're short on cash, it's probably better to wait for Forex Tester to have a sale. The sale price of Forex Tester is only a few dollars more than the regular price of Soft4FX.

However, if you really like using MetaTrader and you think that the features in Soft4FX are good enough, then it's a good option.

It can also be great as a secondary backtesting tool. Maybe you have a second laptop or Windows tablet that you travel with and you simply want to be able to play around with some ideas while you're on the road.

Soft4FX is a great option and you won't have to pay more for a license from one of the more expensive providers. You could even install it on 2 secondary computers, since it comes with 2 licenses.

2. Forex Tester

This has been the industry standard for many years, so you cannot go wrong with using Forex Tester.

However, there are several lingering shortcomings that they have not addressed over the years.

With new competitors coming out, these gaps have become even more glaring, dropping Forex Tester to my #2 pick.

Pros

• Easy to use, similar to most broker trading platforms
• Excellent support, they always return emails quickly
• Common indicators are built in
• Multiple data sources available on paid plan, updated frequently
• Can upload your own historical data
• Backtest on multiple charts at the same time
• Support for automated backtesting, similar to MetaTrader
• Free trial version
• Easy to transfer license between computers
• Neural automated backtesting optimizers, I haven't used them, so I cannot comment on how well they work

Cons

• Difficult to get custom EAs and indicators created
• It's always seemed like the developers are not traders, they aren't good at creating trader-friendly features.
• Reporting and analytics are very limited
• The historical data subscription can increase the cost significantly
• Very limited historical data available with the free data plan
• Only available for Windows, does not work well on Virtual Machines (VMs)
• Can get slow when adding just a couple of indicators to the chart
• Have to export data into Excel to get advanced analytics
• The trading education modules aren't useful
• Automated backtesting functions are similar to MetaTrader, nothing new or improved

Final Thoughts on Forex Tester

I have a love/hate relationship with Forex Tester. I've heard this sentiment echoed by many professional traders over the years.

On one hand, the core set of features is really good. They have been the best manual Forex backtesting option for a long time.

When it goes on sale, it's also very affordable.

But as you can see in the list above, there are also a lot of downsides.

To me, the most disappointing thing is that the developer's approach to the evolution of Forex Tester has been iterative. I've always seen a ton of potential with Forex Tester, but they haven't been able to cash in on what's possible.

The software gets slightly better with every new version, but it never has any quantum leaps.

It's like what Microsoft does.

Microsoft is content to make a slightly better version of their products every year. If we're all being honest, Windows 11 is only slightly better than Windows XP.

All things considered, Forex Tester is still a great option. 

But there's something that I like better…

1. NakedMarkets

This is a new entry to the manual Forex backtesting software market and I really like it.

I like it so much that it's my pick for the best Forex backtesting software available right now.

The primary reason that I like it so much is because it has features that are useful to real traders. The workflow of the software is intuitive and streamlines the trading strategy development process. 

Many times, software solutions are built by developers, not traders. So there are features that may seem useful from an outsider's perspective.

But a real trader wouldn't use them.

What impressed me is that NakedMarkets has manual backtesting solutions that are better than anything I could have ever thought of. Keep in mind, I've been trading since 2007…so I had a really good picture of what I wanted to use.

For example, the idea of Trading Rules in NakedMarkets is fantastic. They are basically building blocks that you can use to speed up manual backtesting, or build up to fully automated strategies.

Just drag and drop them on the chart and they can set your stop loss, take profit, trailing stop and more. This feature alone can save you hours of backtesting time.

But that's just the beginning. You can use multiple Trading Rules to build a manual system, or combine them to create a partially or fully automated trading strategy.

The visual Rule Manager also has more features than similar “no-code” building tools out there.

Pros

• Easy to use, similar to most broker trading platforms
• Excellent support, they answer quickly
• Common indicators are built in
• FREE high quality data from multiple brokers 
• Advanced reports and analytics for NakedMarkets, MetaTrader, Forex Tester and Oanda (via Oanda API)
• Community where you can request features and share trading strategies to test
• Drag and drop trading rules for entries, exits and trade management
• Create trading rules without coding
• Designed and developed by a full-time Forex trader
• Free trial version

Cons

• This is still the first version of the software, so there are still small kinks to be worked out
• Only available for Windows, I haven't tested it on a Virtual Machine (VM)
• Since the rules tool is visual, there might be some limitations on the complexity of the rules you can create

Final Thoughts on NakedMarkets

Although NakedMarkets is new, I love the direction that they are taking.

It's a fresh take on manual backtesting and in my opinion, a quantum leap in streamlining the process.

Backtesting can be boring…you have to enter the same orders over and over.

But if you can automate some parts of the process with Rules, then it can make the process more bearable.

It might even make it fun.

You can learn more about NakedMarkets and get a discount here.

Conclusion

So that's my current pick for the best software for manual Forex backtesting.

Sure, you could use MetaTrader or TradingView for manual backtesting. But they are not built for that and you would have to use a spreadsheet to record your trades.

That's really clunky and takes a long time. The software mentioned above makes the process much easier.

I'll have more tutorials and updates using NakedMarkets in the future. Be sure to sign up for the email list to get future updates.

What's your favorite software? Got questions? Let us know on Twitter.

To see all of our recommended products, go here.

The post Best Forex Backtesting Software Reviewed appeared first on Trading Heroes.

In This Episode:

• Why this trader created his own backtesting software
• Where he learned to trade and the timeframes he trades on
• The website where he shares some of his trading strategies and track record
• How to create drag-n-drop entries and exits WITHOUT coding
• Manual backtesting demo and how his software speeds up the process
• Demonstration of creating and testing automated strategies
• Free historical data from multiple brokers
• How this software could easily replace your trading journal
• And more!

There's a big difference between software that's created by someone who trades and someone who doesn't. This is one example.

I met Denis at The Truth About FX conference in 2017. At the time, he was trading full-time and providing trading signals.

I talked to him a bit on the train ride back from central London.

In talking to him, I found out that he is Beta Trader. It's always cool to meet people behind trading sites. I didn't keep in touch with him after that.

Then a few months ago, I got a message from him via Walter's forum, asking me if I wanted to test his new software called NakedMarkets.

I'm always open to testing software from people I know, so I volunteered to be a tester. We are both students of Walter.

As soon as I read through the documentation, I knew that he had something special.

There are features that I haven't seen in backtesting software under $500, and some features that I haven't seen anywhere.

What I like most about his software is that it is very modular.

So you can create small components, like entry and exit rules. Then you can simply drag and drop those rules on your chart to speed up manual backtesting.

Or you can use those components to build fully automated or semi-automated trading strategies.

One thing that I've been looking for is an easy way to automatically download trades from Oanda and analyze the performance of the account. I thought that a trading journal was the solution.

But I asked Denis if it was possible to do it in NakedMarkets and he implemented it in just a few days.

Amazing!

So NakedMarkets can also be used to analyze live trading performance.

Anyway, there's nothing like seeing the software in action. So watch the video find out more about Denis and how the software works.

You can get a special Trading Heroes discount on NakedMarkets on this page.

Click Play to Watch the Episode

Resources Mentioned

• NakedMarkets backtesting software
• Walter Peters
• NakedMarkets Forum
• The Truth About FX Conference

Other Ways To Get The Trading Lifestyle Podcast

• Click here to subscribe via iTunes (if you like it, a five-star review is greatly appreciated)
• Click here to subscribe via RSS (non-iTunes feed)
• Click here to hear all of the other podcast episodes

Thanks for Listening!

I really appreciate you joining me for this episode of the podcast!

If you know of a trader who would benefit from any of the information in this post, feel free to share it with them.

Be sure to subscribe to the show on iTunes or YouTube and if you love it, a 5-star review is greatly appreciated!

The post Taking Backtesting Software to the Next Level: NakedMarkets // EP30 appeared first on Trading Heroes.

Building your own trading strategy from scratch is difficult. It's a lot easier to find a trading strategy that someone else is trading successfully and tailor it to fit your personality.

With that in mind, I always keep my eye out for new trading strategies and test them out to see if they work or not.

I found this strategy in a Kindle book and it looked like it could work, so I gave it a test. In this post, I'll show you how the strategy works, the testing plan that I created and the results of my testing.

At the end of this post, I'll show you potential upgrades to this strategy and where you can see my additional testing results with this method.

The Trading Method Explained

This trading strategy comes from the book MT4/MT5 & TradingView High Probability Forex Trading Method by Jim Brown. I don't know Jim and I wasn't paid to review this book.

This book was purchased with my own money.

I actually had this book in my Kindle library for about a year before I got around to reading it. Something about it drew me in, but the spammy title also put me off a little.

When I finally opened the book, the trading method made sense and I read the whole book in 1 sitting.

It's an easy read with decent pictures to illustrate the concepts.

Jim is the inventor of this trading strategy and he uses it to trade for a living. Since this is Jim's method, I won't go into all of the details.

You'll have to buy the book to get all of his trading methods, insider tips and download the custom indicators that come with the book. However, I'll show you enough so you can see what I did.

If you like my results, you get the book. If not, you can look for something else.

On the upside, the basics of the trading strategy are simple.

It's made up of 3 moving averages and 2 momentum indicators. The method looks for changes in momentum and marks the chart at points where you can potentially get in at turning points.

As you're looking at a sample chart, you can probably tell that you can use the signals in a couple of different ways. You can either take trending trades or countertrend trades.

I decided to take trend trades only in my test.

The Testing Plan

The great thing about this book is it shows you some excellent entry methods. On the downside, it's light on exit strategies.

In fact, there are no exit strategies.

Jim gives some suggestions on how you can potentially exit a trade, but nothing concrete.

That's one of the biggest downsides of many otherwise useful trading books. They don't give you a complete trading strategy.

There could be many reasons why the author chose not to do this. Maybe his exits are based on reading the market, instead of having set rules.

Nothing wrong with that.

But from the standpoint of someone reading the book and wanting to learn how to trade, it leaves the reader hanging.

That's why I'm sharing my results here.

However, the book does give you a great starting point to create your own strategy.

The other downside is that this book doesn't give you stats on the trading method.

Again, I get why authors do that. They don't want to create expectations or get angry emails from readers who aren't getting the exact same results due to a multitude of reasons that would take a few hours to diagnose.

Therefore, it was up to me to come up with my own exit strategy.

But where to start?

I've found that the easiest way to start testing a trading system that doesn't have set exits is to use a 1X risk profit target. So if the stop loss is 100 pips, then the take profit will also be 100 pips.

This won't work in all cases, but it's a quick and dirty way to help me see if a method has potential or not.

So here's the trading plan that I put together to do my first backtest of the concepts in this book.

• Pair: EURUSD
• Timeframe: Daily
• Risk per trade: 1%
• Entry: Trend trades only. Wait for moving averages to stack up in order. Short to long (top down) in an uptrend, long to short in a downtrend. This is very similar to other trend trading methods that use multiple moving averages. Once the moving averages are stacked in the correct order, I wait for a dot on the chart, while price bounces off one of the moving averages. Red dots are sells and green dots are buys. Open the trade as soon as the candle closes.
• Stop loss: Set the stop loss on the other side of the last swing.
• Take profit: 1X risk
• Trade management: None, set and forget.

Long Example

In this long example, I entered a trade at the green dot marked by the arrow. It was a trade that hit the profit target easily.

As you can see, this trade made much more after it hit the take profit. I'll get into more about how I was able to take advantage of these “extra” moves and increase the output of this basic strategy, later in this post.

Short Example

It's a similar idea here. Enter on the close of a red-dot candle, when the moving averages are lined up correctly and price bounces off the short, medium or long moving averages.

Testing Method

I would normally use Forex Tester for a strategy like this, but the custom indicators are only available for MT4, MT5 and TradingView.

Great.

So I fired up TradingView and a spreadsheet to start backtesting. This method takes a little longer than using Forex Tester, but it gets the job done.

The data in TradingView goes back to 2003, so it's enough to do a solid test.

Testing Results

• Pair: EURUSD (daily)
• Trades: 84
• Win rate: 75.0%
• Total return: 42%
• Max losing trades in a row: 2
• Max drawdown: -3%
• Testing period: May 7, 2003 to January 19, 2022 (~224.5 months)
• Average return: 0.18% per month

Video Version

If you want to see the concepts in action, watch this video.

Final Thoughts

I consider this a good test.

The strategy works.

A max drawdown of 3% is very good.

But this is just the starting point. There might be ways to increase the return of this strategy. 

If you want to learn all of the tips and tricks that Jim teaches, get the book here.

To get all of my future updates where I test new and potentially more profitable versions of this strategy, join my private membership group here.

The post A Simple 75%+ Win Rate Trading Strategy for Forex Trading appeared first on Trading Heroes.

I'm been using Forex Tester for a long time. But there were a couple of versions that I didn't recommend because they had some serious bugs. So will Forex Tester 5 be a zero or a hero?

My testing has shown that Forex Tester 5 works well and does have some useful upgrades. The upgrades are incremental, but given that the cost is the same, I feel that version 5 is worth the money.

Keep scrolling to get the details.

Watch the video or get the text version below the video.

Where Can I Backtest Forex Trading Strategies?

This is the question that led me to Forex Tester (FT) many years ago. Since then, many different backtesting solutions have come to market.

I tested them in this video to see how Forex Tester compared. FT was the winner of that shootout, but I found that one of the other software packages did have some legitimate benefits.

However, at the end of the day, if you want the very best backtesting software publicly available right now, FT is the way to go. 

Now let's get into why I believe that.

Simplified Menu

The biggest cosmetic change in Forex Tester 5 is the menu at the top of the screen. It looks very similar to the “ribbon” menu in Microsoft Office.

I like how the icons are arranged and the layout makes it easy to find things because they are categorized in a very logical way.

This type of menu is much easier to use and is a welcome addition. Forex Tester 4 had a very small and compact that made it really hard to use on a tablet.

So the menu is a great improvement in version 5 and I really like using it.

Strategy Optimizer

Another new addition is the strategy optimizer. It allows you to upload FT automated strategies, or MetaTrader EAs.

You can then do an automated backtest in the software and look for optimizations.

This is similar to the strategy optimizer in MetaTrader 4 and 5.

Forex Tester 5 also goes one step further and they provide automated AI programs that are supposed to help you speed up the process of optimizing your automated trading strategies.

I'm not into automated trading, so I haven't tested this feature. But this can be useful for people who are into trading bots.

Notes Section

Forex Tester also added a notes section, which is really handy. The notes are stored in each backtest and allows you to jot down ideas in each test.

Here are some ways to utilize the Notes section:

• Record ideas on how to change the system for the next test
• Note trade dates that you want to go back and review later
• Write down questions that you have during the test
• Note a chart pattern that you see that you might want to test later
• Journal trades as you take them
• Record your impressions before and after the test

If you store your notes in another place, then it's easy to lose them. Having your notes in the backtesting file is the best solution.

Visual Risk/Reward Tool

Awhile back, I made a video about how to turn the Fibonacci tool in MetaTrader 4 into a visual risk/reward tool. Since then, TradingView has made this a standard tool on their platform.

Now Forex Tester has this tool available in version 5.

To access the tool, go to Charts > Graphic Elements > Risk/Reward Tool.

Then add the tool to the appropriate area of your chart. Here's what that looks like.

This is a great addition to the program. However, if you look closely, there's something wrong here.

The Risk/Reward ratio is not calculating correctly. 

As you can see in the example above, this a buy trade. Since the profit target in green, is bigger than the stop loss in red, the ratio should be greater than one.  But it's not.

I'm sure that they will fix this at some point, but the solution is simple. Just use the opposite tool and you'll be good.

So if you want to calculate a buy trade, use the sell tool, and vice versa.

Multiple Windows at the Same Time

This is one of the biggest advantages of Forex Tester. It's been available in previous versions, but I want to point it out here because it really helps.

In Forex Tester, you can have multiple windows open at the same time. This allows you to watch multiple timeframes and currency pairs at the same time. 

Watch the video at the top to see it in action. It's a really handy to be able to track support/resistance levels on multiple timeframes, track correlation between markets and take trades on multiple pairs at the same time.

I use this feature to watch the next higher timeframe, from the one I'm testing. 

Easy Forex Builder

Let's be realistic.

It's actually really hard to create an indicator/EA builder and give it the ability to everything.

There are many circumstances where you really do need to know how to code, or hire a programmer to do it for you.

Therefore, any “no-code” tool will have limitations. But the Forex Tester team has been building their platform for creating indicators and EAs. It was originally called Visual Strategy Builder, but they have since changed the name to Easy Forex Builder.

They do have a free version that allows you to download 2 strategies/indicators per month. But if you want more, you'll have to pay the monthly fee.

I wasn't particularly impressed with the original beta VSB tool, but you can give it a try and decide for yourself. They may have improved it. In all fairness, I haven't seen a no-code tool that can create complex programs, so EFB is not alone in this regard.

However, I do feel that these types of tools very good for testing basic ideas.

Maybe test a simple strategy with 1 or 2 indicators. Then you can do manual backtesting to refine the idea.

If the idea works, you can code it up or have a programmer do it for you.

Education Buttons

At the time I did the video at the top of this page, the education modules didn't seem to work yet. But now they have the Basic Courses working.

Each lesson is really short and to the point. I went through a few of the lessons in the Basic Courses and they look good.

As you can see, the graphics could be better, but the information is useful.

Downsides of Forex Tester 5

There are a couple of downsides in this software. Obviously there's the Risk/Reward tool bug that I mentioned above.

Another thing that isn't optimal in FT 5 is that the playback can get really slow if you have certain type of indicators on the chart.

I would guess that a lot of that has to do with how complex the calculation of the indicator is, and how many you have on the chart at once. Indicators like the Parabolic SAR can take more time to calculate.

So the solution there might be to get a faster computer. Since I don't use many indicators, if at all, this isn't a problem for me. If you are concerned about this, be sure to download the demo below and test the speed for yourself.

Finally, as I've mentioned about previous versions of Forex Tester, a huge benefit would be a legit reporting system in the software.

They have the basics…win/loss percentage, max losses, trades per month, etc.

But real traders need much more. There was a website that came close in the past, but they weren't able to make money and went under.

In my opinion, upgrading the reporting system would be a huge upgrade to Forex Tester.

Maybe in Forex Tester 6? 

Forex Tester 5 Download

If this appeals to you, get a free demo of Forex Tester and you can give it a try on 1 month of backtesting data.

Use the link in the next section to download the demo.

How Much Does Forex Tester 5 Cost?

The regular price for Forex Tester 5 is currently $299. However, if you wait for one of their sales, you can get it for much less.

On top of that, I have a coupon that will give you an additional discount on top of the sale price. The final price you pay will depend on the sale that they are currently running.

So be sure to check this page to get the coupon and the best deal possible.

Final Thoughts on Forex Tester 5

Backtesting is one of the best ways to develop and practice a Forex trading strategy.

I skipped a few of the features in FT 5 that I already talked about in FT 4. Most of the same features in FT4 are in 5, so if you want to learn about more of the features in Forex Tester, then see this review.

Otherwise, I still recommend using FT 5 for manual backtesting. 

Happy Backtesting!

The post Forex Tester 5 Review appeared first on Trading Heroes.

Backtesting is extremely valuable because it allows you to see if a trading strategy has an edge, before you risk real money.

But there are many ways that you can make mistakes when backtesting. If you make any of the mistakes listed below, you won't have accurate data. 

When you have faulty data, that can cause you to start trading a strategy that doesn't actually have an edge. This usually leads to frustration, losses and believing that backtesting doesn't work.

Avoid that headache by learning how to backtest properly. This video will show you how to avoid the 19 most common mistakes.

The Most Common Backtesting Mistakes

1. Not Having a Written Plan

A written plan is essential to backtesting success.

There will be times when you get caught up in backtesting and forget the rules of the strategy. This is especially true if the strategy you're testing has a lot of moving parts.

So write EVERYTHING down. Here are a few things that you should define:

• Entry signal rules
• Percent risk per trade
• Where to place the stop loss
• Profit target
• How to manage the trade
• Indicators used and settings

But there can be several other things to define, depending on the strategy you're testing. Take some time to figure out every single parameter that you would have to define to do an accurate backtest.

You can get my free trading plan worksheet here.

…or make your own. It doesn't matter which worksheet you use.

Just write down a detailed plan and follow it.

2. Altering Backtesting Trades to be Correct 90%+ of the Time

This is an interesting one.

Some traders want to have a really high win rate and will everything they can to get it.

So they fudge trades in backtesting to make themselves feel better. They roll back the chart and take trades on future knowledge of what will happen on the chart.

In reality, most trading strategies aren't going to have a really high win rate and you won't be able to catch an ideal entry all of the time.

The best strategies are robust. They make money consistently over long periods of time. 

So trying to be a high win rate trader in backtesting doesn't help you develop a robust trading strategy.

You're just fooling yourself into thinking that the system is better than it really is.

Stick to the testing plan and get an honest result.

The more your backtesting simulates live trading, the better your chances of success. 

3. Not Taking Enough Trades in Testing

I've seen several traders backtest 6 months worth of daily chart data and declare that a system has an edge.

Yeah, it has an edge in those 6 months, but what about the rest of the time?

Test your strategy with as much historical data as possible, and take as many trades as possible. Your goal is to have a robust trading strategy that will make money in different market conditions.

Optimizing a strategy to a specific time period is called curve fitting and will set you up for disaster. 

4. Not Accounting for Your Emotional State

Everyone has a bad day here and there. At the very least, we have days when we are really tired.

Just like in live trading, your mood and your emotional state will affect your backtesting.

You'll miss trades and you just won't be very sharp.

Account for your emotional state when backtesting and don't test if you aren't feeling up to it.

Also test a system a few times on different days, to account for potential distractions or off days.

5. Quitting When the Results Aren't Immediately Spectacular

Some traders quit a backtest if it isn't profitable within the first few trades.

This doesn't make sense because the beginning of a test could just be period where the system has a normal drawdown.

So stick with a test until you hit a catastrophic drawdown that would not be acceptable in live trading.

A series of 7 losses in a row and a 7% loss is not catastrophic. It doesn't feel good, but any good trading system can overcome that level of drawdown.

6. Changing the System in the Middle of a Test

This one is very common…

“I'll just make one little tweak here.”

“Oh this might work better.”

When you change a system in the middle of testing, you have contaminated data.

It's like if someone mixed apple juice and orange juice together, then gave it to you to drink, and asked you which one tastes better.

Obviously, it would be impossible to tell because you're tasting both of them at the same time.

Likewise, when you change the rules of a trading system, you don't know how your new rules would have performed in the past and you don't know how your original rules would have performed after the change.

Test each system separately and evaluate each one with complete data. 

7. Not Following the System

Some traders write down a trading system, then they don't follow it…at all.

I'm not sure why that happens. They might have a problem with authority or something.

But this almost goes without saying…almost.

Write down the rules, then test the rules as they are written.

Most traders can do this. But if you have a tendency to stray from the rules, find a way to remind yourself to stay on track.

8. Not Doing Enough Analysis After Testing and Not Having a Good Reporting System

Knowing the win rate and return of a trading system is not enough.

You have to know things like:

• Maximum drawdown
• Highest number of consecutive losing trades
• MAE and MFE
• Yearly return
• Monte Carlo simulation results
• And more!

You can get this information by using backtesting software that provides this information, or you can import your backtesting results into Excel or Google Sheets.

These additional stats will show you how to improve your system and what to expect in live trading.

9. Thinking That Live Results Will be Exactly the Same as Backtesting

Successful trading requires that we think in probabilities, not certainties. 

A trading system that looks good in backtesting may not perform exactly as we expect in live trading. There can be a few reasons for this.

For starters, you may be getting nervous when there's real money on the line and you could be doing things that you didn't do in backtesting. You might be moving your stop loss, or you may cut your winners short.

Some traders hit a drawdown when they first start trading a system live and they think that the system is broken. But in reality, if they reviewed their backtesting, they might realize that it was a normal drawdown.

Third, there might be a variable that you aren't accounting for in your backtesting. That could be the spread, trading at the wrong time of day, or something else.

Finally, there might be something about the markets that's different from when you backtested. There might be unusual news events or the markets may have fundamentally changed.

Your live trading results should be similar, but not exactly the same as your backtesting. Use your backtesting as a guide, but understand that you also have to account for a certain degree of random market fluctuations. 

10. Not Considering Portfolio and Correlation Risk

Strategies cannot be traded in a vacuum.

Even if a strategy works well on 2 Forex pairs separately, trading the strategy on both pairs at the same time might not be a good idea.

You may have to reduce your risk on each trade, or decide to only take the signals that look the best.

Trading multiple markets with the same trading strategy can dramatically amplify your drawdowns, so be sure to factor that into your backtesting.

An easy way to do this is to merge the results of both tests into one spreadsheet and analyze the results together.

11. Only Testing on 1 FX Pair/Stock/Commodity and Assuming it Will Work in All Markets

I blame this one mostly on trading educators. 

There are quite a few educators that will tell you that their trading system will work in any market.

Maybe. But I haven't found a case where that is true yet.

Each market and each individual stock, currency pair or futures contract has its own personality. They are influenced by different fundamental factors and market dynamics.

Therefore, thinking that you can test a strategy in one market and apply it to all the markets in the world is simply being lazy.

Test each market before you risk real money.

12. Being Distracted and Missing Trades

Yeah, I get it.

Backtesting can be tedious at times.

I used to play movies in the background, or listen to music while backtesting. Now I'm more conscious of what I'm doing when I backtest.

Watching movies is just a bad idea and you should be aware of the type of music you're listening to. Turn off your phone and eliminate as many potential distractions as possible. 

If you want to listen to music, understand how it affects your concentration and mood. You might like to listen to Metallica in your car, but that type of music probably isn't the best when you want to focus.

…or maybe it is.

Do you.

Awareness is always the key to improvement. Be aware of how different stimuli impact your mental state and eliminate the ones that don't help you.

At the same time, think about how to add things that do help. Maybe open a window to get some fresh air, add some decorations in your room, or listen to uplifting music.

13. Entering/Exiting Trades Optimally and Not Honestly

This one can actually go both ways.

There is something to be said for testing a system with an optimal entry.

What I mean by that is entering a trade at the point where it would make the most money and follows your plan, versus where you probably would have entered it in live market conditions.

Entering a trade according to your plan may seem black and white. But when you're testing a discretionary system, there can be big gray areas.

Many traders set the backtest speed to full-speed playback to get through as much data as possible.

Then they overrun the entry point and make trading decisions based on the data that they already saw.

You won't have the benefit of future information in live trading, so don't use it in your backtesting.

The only way that backing up and entering at the optimal point helps, is if you have very precise, mechanical entry rules.

If there is any discretion involved in your entry, like looking for a support/resistance level, then there's the temptation to scroll the chart back to the ideal entry.

To prevent this, look for backtesting software that only allows you to move forward on the charts. This will keep you honest. 

14. Only Following Other People's Rules and Not Experimenting for Yourself

Predefined trading systems usually only work well for one trader.

…and that's not you.

Every single successful trader I've talked to or heard about has had to customize their strategies to fit their personality. Myself included.

So learn trading systems from successful traders. But consider those systems as a jumping off point.

When you find a system you like, be willing to customize it fits your personality and lifestyle. Play with different ideas and have fun with the process.

Your chances of success will increase dramatically when you start thinking for yourself.

15. Throwing Out a System Because it Doesn't Make X% Per Month

A monthly return goal is an expectation that may or may not be achievable by your trading system.

It can be possible to have monthly goals for day trading strategies. But for timeframes higher than that, it's almost impossible.

I think that it's much better to have a yearly goal because that gives your trading strategy room to go through a few winning and losing streaks.

So don't try to cram every trading strategy into your expectations. Your expectations are an arbitrary number anyway. 

First find out if a strategy is profitable, per your plan.

If it passes that first test, then you can experiment with versions of the entry and exit to try to increase the return.

Also remember that you can potentially use that strategy on other timeframes and in other markets to increase the return even more.

Just be sure to backtest it first. 

16. Trying to Over Optimize by Adding More Indicators/Conditions

This is a very common issue.

Humans are naturally built to want to make better versions of whatever they create.

So in search of perfection, we try to improve the win rate of trading strategies by adding more rules to a trading system, in the hope of filtering out losing trades.

Adding more indicators or conditions usually makes a trading system worse.

Your goal when developing a trading system is to find something that is as simple as possible, and is profitable over a long period of time.

Because you'll never develop something that's perfect.

17. Trying to be an Automated Trader When You Should be a Manual Trader and Vice Versa

Some people are better manual traders. Others are better at coding and are more likely to be successful trading automated programs.

Consider your skills and strengths. 

I would say that most people are better off as discretionary traders. When they find a system that is profitable, then they can do Incremental Automation and hire a programmer to automate all or parts of their strategy.

However, if you're a programmer or engineer personality type, then fully automated trading could be for you. These types of people thrive on structure and can translate trading ideas into code.

18. Not Studying the Rules of a System That You're Testing (if learned from others)

This is one that's often overlooked.

I've caught myself a few times, where I was too eager to backtest a system and jumped into testing, without studying the rules of the system closely.

Upon further review, I discovered that I had missed a few key points that could have made the strategy profitable in my backtests.

So take your time when you're learning a trading strategy. Go over the material several times to be sure you haven't missed any details. 

Then start testing.

19. Preset Bias to Prove or Disprove the System

Finally, some traders have a preconcieved notion about a trading system before they even start testing it.

For example, a trader might believe that most breakouts are destined to fail. So if they are testing a breakout system, they might cut the winners short because they want to capture profits as soon as possible.

The bottom line is to leave your biases at the door.

Follow the plan exactly and don't think that you know better.

Final Thoughts on Backtesting Mistakes

Even experienced traders can sometimes make these mistakes, so always be aware while you're testing and try to be as scientific as possible during the process.

If you follow these guidelines, you'll be rewarded with quality data that will help you improve your trading performance.

Break the rules and you could be spinning your wheels on the Trading Silodrome for years.

It's your choice.

The post 19 Backtesting Mistakes Beginners Make appeared first on Trading Heroes.

Learn how to get started with the backtesting feature inside ThinkTrader called Traders Gym. This step-by-step guide will show you exactly what you need to get started with the desktop version of this free manual Forex backtesting software right now.

I wasn't able to find a good manual on how to setup Traders Gym, even on the ThinkMarkets website, so I decided to create one.

Stick around until the end to find out how well Traders Gym compares to the top backtesting software out there.

Step 1: Download the Desktop Version of ThinkTrader

Get started by going to the ThinkTrader website. Then download the appropriate version for your device.

The link is at the top of the page.

I would highly recommend using the desktop version for backtesting. It's much easier to use than the mobile versions.

ThinkTrader used to be called Trade Interceptor, so don't get confused if you see both names online.

There are still some Trade Interceptor webpages out there. They simply redirect to ThinkTrader when it comes time to download the app.

Step 2: Setup an Account and Login

Once the software is installed, sign up for an account. It's free to sign up and allows you to use the backtesting feature.

Now that you have a login, open ThinkTrader and enter your username and password.

Make sure that the Traders Gym button is selected, then click the Login button.

Step 3: Create a New Chart

One weird glitch with Traders Gym is that there's no easy way to go back to the beginning of a chart.

In addition, if you open a new chart and there's already a chart open on that currency pair, your new chart will start where your existing chart stopped.

Therefore, in order start a fresh chart at the beginning of the data set, you need to open a chart for a currency pair that is not already open.

For example, let's say that you have a EURUSD chart currently open and you've stopped at 11/2/2019. When you go to open another EURUSD chart, it will also open at 11/2/2019, not at the starting date that you select.

Now that you understand that, open a new chart by clicking the plus symbol at the top of your screen.

A popup window will allow you to set the parameters for your test.

You can select the following:

• Feed: There are only 2 data sources available. The default TT feed is a good place to start.
• Symbol: Select the symbol you want to test. Stocks are also available.
• Price type: Select bid, ask or average.
• Timescale: This is the timeframe chart you want to use for you test.
• Initial interval selection: Drag the slider all the way to the left to start testing from the first date in your selected range.

It initially looks like you can only backtest 1 year of data, but you can actually get more history. If you click the lower left date on the slider, it allows you to select an older date.

Once those settings look good, click OK to get started with your test.

When your chart first opens, the candles will be huge! 

Adjusting the zoom on the chart is not intuitive. The only way that I found to zoom in and out is to use the scroll wheel on your mouse, or scroll up and down on your trackpad. 

Step 4: Add Your Indicators

Once your chart opens, you can add indicators by clicking on the Indicators button in the toolbar in the middle of the screen. 

They provide most of the popular indicators, so there's a good chance that your favorite indicator is there.

Traders Gym doesn't allow you to upload custom indicators, so if you trade with a custom indicator, you're out of luck.

Step 5: Set Your Speed

The last thing that you have to do before you start testing is to set the speed at which your charts will move forward.

There are 2 settings:

• Tick size: Set how much each tick will move. For example, you could be testing on the Daily chart, but you want to see each tick move on the 4-Hour timeframe.
• Overall chart speed: Set how fast the chart will scroll forward.

Step 6: Start Placing Trades

Now you're ready to start testing!

To start testing, hit the play button below the chart. You can use the back and forward arrows to move one candle at a time.

When you want to take a trade, simply right-click on the chart and select Order window from the menu.

That will bring you to the order window. Input the details of your trade and click Place Order.

Your trade will appear in the Active tab in the account section of the screen. Use the Pending tab to see pending orders and the History tab to see all of your past trades.

To close the trade right-click on the trade and select Close selected orders. You would also use the same process to do any of the following functions below.

You can use the settings button to deposit or withdraw funds, or delete the account.

To create a new account, click the plus symbol next to the account tabs.

ThinkTrader Traders Gym Review

Here are a few of my thoughts after using Traders Gym. The biggest upsides are:

• It's free
• You can use it on desktop and mobile platforms
• They provide a good amount of free historical data

However, there are some downsides. 

I have several issues with this software, but these are the top 3.

Frequent Disconnection

An annoying thing with ThinkTrader (Mac) is that it keeps dropping the internet connection and reconnecting. This makes the icon bounce on the bottom of my screen and is really distracting.

I don't know of any trading program that has to reconnect so often.

It really makes me wonder how reliable this would be if it was used for live trading.

This literally happens every 5 to 10 minutes or so…

Have to be Connected to the Internet to Backtest

One of the biggest benefits of software like Forex Tester is that you can download the price data to your computer and backtest offline.

I can see where this might not be possible on the mobile versions of ThinkTrader because mobile devices tend to have very limited storage.

Downloading data is certainly possible on most desktop devices however, but is not available on the desktop version of ThinkTrader.  

In addition, you need to be connected to the internet and login to even get to the backtesting screen. 

I understand why they do this, but it doesn't make sense when it comes to backtesting.

Only 1 Data Source, No Option to Upload

Finally, there's no option to upload custom data or indicators. It would be nice to be able to import my own data sets like you can do with MetaTrader.

If you need custom indicators for your trading strategy, then you're totally out of luck with ThinkTrader.

Conclusion

So that's how you start manual backtesting with Traders Gym.

You are probably wondering if ThinkTrader is worth using for Forex backtesting.

The answer to that is relative. It really depends on what your needs are.

It might be good enough for some, but totally unusable for others.

To see my complete review of Traders Gym, and how it compares all of the major backtesting platforms on the market, head over to this post.

That video will show you examples of each software, a complete backtest for each and you can see the software in action.

The post ThinkTrader Traders Gym: Beginner’s Guide appeared first on Trading Heroes.

One of the best parts of MetaTrader 5 is that you can program automated trading strategies, called Expert Advisors (EAs), with the MQL5 programming language. Then you can test your strategies in the MT5 Strategy Tester.

Many traders use EAs to create fully automated trading strategies. However, EAs can also be used by discretionary traders to test new ideas, or in Incremental Automation.

Regardless if you go fully or partially automated, this post will show you how to get started with the MT5 Strategy Tester.

I'll show you how to install .ex5 and .mq5 files, how to do your first test, and how to find a MT5 programmer, if you don't know how to code.

The Difference Between .MQ5 and .EX5 Files

Let's start by taking a look at the two types of files that can you can install in MT5.

There are two different types of files because there is one file that humans can read and one file that that MetaTrader can read.

The file that human programmers can read (the .mq5 file) is not very efficient, so it's converted into a version that the computer can use efficiently (the .ex5 file). These files are also known by the following names:

• .ex5 = compiled, program or executable file
• .mq5 = source code file

When you add a .mq5 file to MT5, it will automatically be converted to a .ex5 file, when you open MT5. 

If you purchase an EA on the internet, it will usually come in .ex5 format. This is because EA developers want to protect their hard work.

The .ex5 file hides their programming and doesn't allow others to see how it works.

However, if you create an EA yourself, or you work with a programmer to create an EA from scratch, the EA will be in .mq5 format.

Before working with a programmer, be sure that they will give you the .mq5 file. Having this file will allow you to make changes to your EA in the future.

How to Install an Expert Advisor in MT5

In order to start using Strategy Tester in MetaTrader 5, open MT5, then go to: File > Open Data Folder.

You can also hit Ctrl+Shift+D on your keyboard.

Once the folder is open, go to: MQL5 > Experts.

Then drag your MT5 Expert Advisor into the folder. The EA can either be in .ex5 or .mq5 format.

After the file has been moved, then restart MT5. You're now ready to start testing your EA in Strategy Tester.

How to Use Strategy Tester

Set Up Your Test

When MT5 restarts, go to: View > Strategy Tester. You can also press Ctrl-R on your keyboard to open Strategy Tester.

It will appear in a window at the bottom of your screen.

Here's what the settings do. They are listed in the order that they appear on the screen.

• Expert: Select the Expert Advisor you want to test from the dropdown.
• Symbol: Select the symbol you want to backtest.
• Timeframe: Select the timeframe you want to backtest.
• Dollar sign icon: Click on this icon to get details of the symbol selected.
• Date: Select the preset date ranges.
  • Entire history
  • Last month
  • Last year
  • Custom period
• First date dropdown: If you select Custom period, select the starting date of your test.
• Second date dropdown: If you select Custom period, select the ending date of your test.
• Forward: This allows you to do forward testing of your trading strategy. MT5 will split your data into 2 parts and only do optimization on the first part. Then it will test the optimized settings on the second part of the data. If you get similar results with both sets of data, then there's a higher probability that the settings are reliable and not subject to curve fitting. When forward testing is activated, you will see an additional tab that shows the forward testing results.
  • No: Forward testing not used.
  • 1/2: Half of the time period is used for the forward test.
  • 1/3: One third of the time period is used for the forward test.
  • 1/4: One fourth of the time period is used for the forward test.
  • Custom: Use the dropdown to specify the first date of the forward test.
• Delays: You can select from several delay times to simulate delays between the time that MT5 gets a trade signal and the time the trade actually gets executed. This is useful if the connection to your broker is slow.
• “Select delay…” Button: This can be used to include other factors that might affect profitability like slippage, non-tradable time periods, margin and commissions.
• Modeling: You can select how ticks are generated. You can find more information on that here (it's pretty complex).
• Deposit: Adjust your initial deposit and deposit currency.
• Leverage: Choose the leverage you'll be using in live trading.
• Optimization: Choose the algorithm type you want to use. There are different ways that you can optimize your EA by having MT5 run through a series of values for each of your settings until it finds the best setting. Select the inputs you would like to optimize on the Inputs tab. You can read more about optimization here.

Start Your First Test

Once you've setup the test, click the green Start button. If you've checked the “visual mode…” box, the Strategy Tester Visualization window will open and show you the backtesting trades on the chart.

Use the slider to increase or decrease the speed of the test. This will allow you to watch your trades and see if your EA is working as you expected.

If you didn't check the “visual mode…” box then the test will run without seeing the trades on a chart. The best way to see the progress of your backtest is to flip to the Graph tab.

That will allow you to see live update of your equity and account balance.

Review Your Results

Once your test has completed, it's time to review your results. Go to the Backtest tab to see the stats on your test.

Where to Get MetaTrader 5 Expert Advisors

There are many ways to get a MT5 EA, but here are a few good places to start.

• MetaTrader 5 Market
• Trading Heroes EAs and Indicators 

There are also many other websites that sell EAs and some offer free EAs for download.

If you have an idea for a trading system or EA, you can also create your own EAs.

How to Find a MT5 Programmer

The good news is that you don't have to learn programming…if you don't want to. You simply have to explain your strategy to a programmer and have them create the EA for you. 

I created a list of Forex programmers here. Talk to them and see if any of them are a good fit.

Be sure to read the guide in the beginning to find the best programmer for you.

Learn to Program Yourself

If you would like to learn MQL5 programming, then start with the official MQL5 docs.

The best way to learn programming is to choose a simple project, then learn through trial and error.

For example, you could start off by programming a simple EA that opens a long trade when price closes above a moving average and closes the trade when price closes below the moving average.

…and the opposite for short trades.

It also helps to find free code on the internet, study how it works and make simple changes to the code. You might have to spend a couple of weeks learning how to code, but it can really pay off.

When you can code for yourself, you can test trading ideas, without paying for a developer to create the EA for you.

Conclusion

A final word of caution. Be sure to check, and double check every EA you install.

There can be bugs in the programming, which can have disastrous results. Even if you run an EA through the Strategy Tester, the results in live trading can be different.

So even if an EA does well in backtesting, always test it in a demo account for a few months before you put it into live trading. 

But all of that testing can be worth it, if you can find an EA that will help you make profits while you're away from your computer.

The post How to Use Strategy Tester in MT5 to Backtest EAs appeared first on Trading Heroes.

As you probably know, I've been a big fan of Forex Tester, almost since the beginning of this site.

But curiosity started to creep in…

Is there something better out there?

I've been using Forex Tester because it works well, so I didn't have the need to look for other software solutions. But I believe that it's always a good idea to periodically review what you are doing in life and in trading, and make upgrades…when it makes sense.

So I decided to revisit the Forex backtesting software landscape this year and take a good hard look at all of the viable options out there.

Maybe there's something that's better, and at a cheaper price. If there is, then I would love to recommend it to my readers as a better solution…or at least a viable alternative.

To that end, I researched all of the manual Forex backtesting software solutions on the market and tested them with the same trading strategy.

Learn what I discovered, in this video:

Update: I recently discovered a new software that I feel is better than all of these options.

Learn about it here.

Rules for this Challenge

I wanted to test trading products that would be affordable for most traders, so here's the criteria I used:

1. The software can be purchased for less than $200 total (for one-time downloads), or less than $200 per year (for subscription products)
2. The software must be able to be used for manual backtesting
3. The software must be able to backtest the Forex market

From there, I'll backtest a trading strategy that I know nothing about, then reveal the results.

Actually doing the backtesting will reveal a lot about the software.

The Challengers

Based on the criteria above, I rounded up the following challengers:

• Forex Tester 4 (paid, one-time)
• Think Trader, formerly Trade Interceptor (free)
• Soft4X (paid, one-time)
• MetaTrader 5 (free)
• TradingView (free and paid, subscription)
• NinjaTrader (free)
• Excel (paid, one-time)

UPDATE: Forex Tester 5 is now available. Watch the review video here.

You might have a few questions about these products, so I'll clarify my choices.

Yes, the regular price of Forex Tester 4 is $299. However, they frequently have sales where you can get it for less than $140, which qualifies it for this test.

You might think that Excel doesn't belong on this list. I'll explain why I've included it in a bit.

I'm using the Pro version of TradingView, which is currently less than the $200 per year minimum. If you upgrade to the higher plans, then you would be over $200 per year. The price might go up in the future, but it currently qualifies, as of the original writing of this post.

The Categories

Here are the categories that I'll be judging these software solutions on:

1. Overall ease of use
2. Value for money
3. Data availability
4. Usability for manual backtesting
5. Best overall manual backtesting software

Alright, now that we have that out of the way, let's take a look at the strategy that I'll be testing.

The Trading Strategy

I've never tested moving average crossovers because they didn't make sense to me. My belief was that as soon as two moving averages cross over, you've already missed the easy part of the move.

…or so I thought.

…but what if they really do work?

I'm willing to keep an open mind, until I get conclusive proof.

That's why we test. 

So I approached this like a new trader and I Googled:

“moving average crossover strategy forex”

The first legit-looking search result that came up was from the DailyFX website.

When I clicked on the link, I was taken to the site with the trading strategy “rules.” This strategy was a perfect test because it's traded on the daily chart, so I could test it quickly.

The entries and exits are fairly straightforward, so you can test it too and verify my results.

…and it also highlights a few key weaknesses in most of the free trading education on the internet.

You can see the original strategy here.

According to the blog post, the following are the “rules” for the strategy. I use quotations because what I found wasn't a complete set of rules.

For future reference, the title of the post is: “Learn Forex: Trend Trading Rules with Moving Average Crosses.”

This is something important to pay very close attention to. Most of the blog posts, YouTube videos and free eBooks on the internet aren't giving you the rules for a trading strategy.

They are giving you trading ideas, guidelines or concepts. 

Ideas are a good start, but too many new traders think that this is a complete strategy, don't test it, and fill in the blanks with their own rules.

…and they wonder why they lose money.

Guidelines From the Post

Anyway, back to the DailyFX guidelines. Here's what I gathered from the post:

• Use the 50 and 200 moving averages, I'm assuming the simple moving average
• When the 50 crosses over the 200, then enter in the direction of the crossover
• Set the stop on the other side of the 200 SMA
• Trade this on the daily chart

Notice that there are key elements missing from this trading plan.

What I Added

Here's what I had to add, to make this a complete trading strategy. I added as little as possible, to make this a tradable plan. There are other tweaks that I would ordinarily make, but let's start simple.

• Risk 1% per trade
• Take profit when price closes on the other side of the 50 SMA
• Set and forget, no adjusting of the stops or take profits once the trade is entered

Now we have a complete strategy.

Remember that most trading “strategies” out there aren't really strategies because they are missing a lot of key definitions. You can use this worksheet to define a complete strategy.

Finally, I'm going to be testing this strategy only on the EURUSD. Since I'm going to be testing this strategy many times with different data sources, this will also give us a very good indication of if this strategy works or not. 

Example Charts

It helps me to have a visual of how this strategy works. So here are a couple of examples on a chart.

Here's a long example:

A short example:

Testing Results

Once I had a trading strategy to test, I started testing it on each software product. I also tracked the time that it took to test the strategy, so you can make software decisions based not only on cost, but on time savings.

You can see complete recordings of the tests in the video at the top of this page.

Here's a breakdown of the results from each test.

ThinkTrader

• Win rate: 39%
• Return: 16.7%
• Number of trades: 23

Learn more about TT here.

NinjaTrader 8

• Win rate: 50%
• Return: 38.4%
• Number of trades: 32

Learn more about NT8 here.

MetaTrader 5

• Win rate: 46.1%
• Return: 33.6%
• Number of trades: 26

Learn more about MT5 here.

TradingView (paid, Oanda data)

• Win rate: 47.1%
• Return: 34.4%
• Number of trades: 21

Learn more about TV here.

Soft4X

• Win rate: 28%
• Return: 61.8%
• Number of trades: 25

Learn more about Soft4X here.

Forex Tester 4

• Win rate: 33%
• Return:15.2%
• Number of trades: 21

Learn more about FT4 here.

Get the best Forex Tester alternatives here.

TradingView (free, FXCM data)

• Win rate: 38.6%
• Return: 24.9%
• Number of trades: 102

Testing Analysis

So all of the tests were profitable, but they had different results. Still, I would say that this strategy has an edge.

But you may be wondering why the results were so different between the different software products.

Let's take a look at why this could be and how this affects your confidence in backtesting results.

There are several reasons why the results could have been different:

• The data is always different from broker to broker and maybe that's just how it worked out.
• Since I only tested once per software program, I might have made some execution errors. This is why it's important to test more than once.
• There may have been some settings that were different between the platforms.
• The number of trades was relatively low, so maybe the averages haven't had time to work out yet.

This difference in results also brings up an important point. You should test with data from different brokers and currency pairs, to see how robust a strategy is.

Backtesting software that only allows you to use 1 or 2 data sets won't give you the full picture of how well a strategy works. 

But overall, this strategy was profitable across the board. So if this strategy interests you, it might be worth checking out. 

Be sure to test it a few times with different data feeds before moving it into forward testing.

Forex Backtesting Software Rankings

Testing Efficiency

Before I get into the rankings, I'll share with you my efficiency rankings.

I measured the efficiency of each software in days of historical data tested, per minute of backtesting time. 

According to this measure, Soft 4X came out on top.

But remember, faster isn't always better. You can miss trades when you go too fast. 

I actually like the fact that Forex Tester 4 has a reasonable top speed, so you don't overshoot trade entries. In the end however, it's up to you to set a speed that works for you. 

Since this was a simple and straightforward strategy, I could go really fast.

On this other hand, if this were a more complex strategy, I would predict that I would have to go slower and the efficiency rating would be very similar across the board.

Data is data however, and those were my results for this strategy.  

Now that I had a chance to try all of the backtesting platforms, here are my final rankings. I'll also give you some analysis on why I chose the top two in each category.

If you want to hear the complete analysis of all the lists, watch the video at the top of this page.

Overall Ease of Use

1. TradingView (paid)
2. Forex Tester 4
3. MetaTrader 5
4. ThinkTrader
5. Soft4X
6. TradingView (free)
7. NinjaTrader 8

TradingView is such a pleasure to use. You can use it on almost any device with a browser and you don't have to install any software. That's why it's my favorite charting and trading platform.

Forex Tester 4 is second because it's very well integrated, but it still only works on Windows, which is frustrating. You can also download a lot of different data feeds from within the program, making it much more useful than the other software on the list.

Value for Money

1. Soft4X
2. Forex Tester 4
3. ThinkTrader
4. MetaTrader 5
5. TradingView (paid)
6. NinjaTrader 8
7. TradingView (free)

Soft4X is currently under $100 and the best value for money. It provides 2 data download sources built-in, which is good enough for most people to get started. You can also upload your own data into MT4, if you want to test with data from other brokers.

The only downsides to Soft4X are that it's little clunky and it doesn't automatically save your work. If you don't hit the save button before you close, you will lose all of your data.

But Soft4X does automatically track your backtesting trades, which is a huge bonus. It also provides a MT4 report for your trades, which is really nice.

Forex Tester 4 is slightly more expensive than Soft4X, when it's on sale. However, it is a much more integrated solution and easier to use, so I feel that it's worth the extra cost.

If I'm only considering value for money however, Soft4X is the better choice.

Data Availability

1. Forex Tester 4
2. TradingView (paid)
3. TradingView (free)
4. Soft4X
5. MetaTrader 5
6. NinjaTrader 8
7. ThinkTrader

Forex Tester's data service allows you to download data from multiple brokers, right in the software. That alone is a huge time saver because you don't have to search for third party data, then store it on your computer.

However, if there is third party data that you would like to use, then you can upload that into Forex Tester to. It really is the best solution.

TradingView gives you instant access to data from multiple Forex brokers, which is awesome. But you cannot upload your own data, so that's why it's at number 2.

Usability for Manual Backtesting

1. Forex Tester 4
2. Soft4X
3. ThinkTrader
4. TradingView (paid)
5. MetaTrader 5
6. NinjaTrader 8
7. TradingView (free)

Forex Tester still wins in this category. It's a much more integrated solution, it tracks your backtesting trades automatically and it has most of the frequently used indicators.

You can also have custom indicators programmed for you (find a programmer here), and you can even test automated strategies.

Since Soft4X is a plugin to MT4, there are limitations to the software. But since it also saves you from using a spreadsheet to record trades, it's a great option.

Learn about the best Forex Tester alternatives here.

Best Overall Software

1. Forex Tester 4
2. Soft4X
3. TradingView (paid)
4. MetaTrader 5
5. ThinkTrader
6. Tie: NinjaTrader 8 and TradingView (paid)

Forex Tester 4 is still the best Forex backtesting software for manual testing. I can't say that I'm surprised.

However, I'm extremely surprised (in a good way) with Soft4X. 

It has matured into a very viable backtesting option. If you're strapped for cash, or if you aren't sure if Forex trading is for you or not, then it's totally worth checking out Soft4X.

The only caveat to that statement is that I haven't stress tested Soft4X, like I have Forex Tester. I've literally tested tens of thousands of trades with Forex Tester, but only a handful with Soft4X.

In addition, since MetaTrader is phasing out MT4, who knows how long we will be able to use Soft4X, because they don't have a MT5 version yet.

So, if you want the absolute best product on the market, Forex Tester 4 is it. 

Excel

I mentioned in the beginning that I would explain why I've included Excel on this list.

There are certain individuals out there that believe that Excel is the best solution for manual backtesting.

So if you come across anyone that insists that Excel is a good manual backtesting solution, then point them to this post.

Excel can be used for testing some automated strategies.

But it's totally worthless for manual testing. There are no charts and you aren't practicing the mechanics of entering trades. 

Backtesting software can also be used for trading practice, much in the same way that a boxer goes to the gym to train.

Excel cannot be used for that either.

Final Thoughts on the Best Manual Backtesting Software for Forex

Whew, so that's it!

This took a lot of time and research, but it was worth it.

In the end, Forex Tester is still the best software out there for manual backtesting. 

But I'm glad that I also found Soft4X. It's a good software solution that has some drawbacks, but can be a good solution for some people.

I'm just a little nervous that it only works on MT4, when that version is being phased out.

I also found another trading strategy that could have an edge. More testing would have to be done on this strategy, but it looks promising.

Trade well!

The post Best Forex Backtesting Software for Manual Testing (Comparison) appeared first on Trading Heroes.

MetaTrader 5 is a solid automated backtesting platform.

But did you know that it's also a pretty good manual backtesting platform?

In this post, I'll show you how to use this free software to manually backtest your strategies.

This is a great option if you don't want to purchase software like NakedMarkets.

I'll give you all the tools that you need and the exact steps on how to do it.

If your broker only has MT4 available, then It will work in a very similar way.

Why You Should Backtest

Backtesting is an excellent first step in helping you determine if a strategy has an edge or not. Since you can run through historical data very quickly in backtesting, this gives you a lot more data than if you only traded in a demo or live account.  

Testing that might take months or years in demo trading, can be completed in a matter of days or weeks with backtesting.

You can also practice a strategy when the markets are closed, making it an ideal training tool.

So it's extremely beneficial to learn this skill and MT5 is a good software to start with because it's free.

This is the beginning of the roadmap to successful trading. To get a copy of the Trading Success Roadmap, read this post.

Here we go…

Download MetaTrader 5

The first step is to download MetaTrader 5.

You can get the software from your broker or you can download it directly from the MetaTrader website.

It's usually best to get it from your broker, but if you don't have a broker yet, the MetaTrader version will do just fine.

Once you have a broker, you can connect to your broker through the MetaTrader version.

When you get the software from your broker, it's automatically setup for that broker, so it can be a little easier to get started.

Either way, you can get the complete MT5 installation instructions here.

Download Your Data

In order to do a valid backtest, you should have as much historical data as possible.

Over the years, I've tried several backtesting solutions that only allow you to test a couple of years of data.

That's totally useless because you won't have enough trades to make a valid decision about a trading strategy.

So get as much data as you can. To download additional data, go to: View > Symbols

Then select the currency pair that you want to download data for.

After you've selected the pair, click on the Bars Tab.

In this example, I'm going to download the USDCAD currency pair.

On the Bars tab, select the timeframe of data you want to download, then the starting and ending dates of the historical data.

Finally, click the Request button to do the download. I found that I had to click the button several times to get the data.

So if you don't get it on the first try, keep trying.

If you have your own data, then you can upload it with this button.

Once the data is downloaded, you will see it in the window. You can scroll through the data to see how far back it goes.

That will give you the data you to do your backtesting.

You can also find third party companies that provide market data for you to upload into MT5.

Open Your Spreadsheets

Trade Tracker Spreadsheet

Before you get started, you'll need a spreadsheet to record your results. One of the biggest benefits of other software is all of this information is automatically recorded for you.

But if you would like to continue using MT5, then create a spreadsheet with the following columns:

• Open date
• Open time (if day trading)
• Currency pair
• Long or short
• Open price
• Close price
• Stop loss price
• Take profit price
• Pips result
• Pips risk
• Pips to profit target
• % Risk on trade
• Risk multiple result
• $ P/L
• Running balance
• Wins/losses
• Win %

Once you've built your spreadsheet, then move on to the next step.

Backtesting Results Spreadsheet

Next, you should keep a spreadsheet that tracks the results of each of your individual tests.

Be sure to track the following for each currency pair:

• System name
• System notes
• Chart timeframe
• Version
• Test number
• Return
• Win Rate
• Trades

Then create a sum and average in the last two columns.

Keep Your Trading Plan in Front of You

When you're backtesting, it can be easy to deviate from the plan. If you're like most people, you'll start tweaking the strategy in the middle of the test.

I've done this before too, so that's why I keep my trading plan in front of me while I'm testing.

It will keep you on track and ensure that you are sticking to the plan.

You can get a free PDF download of the Trading Plan Worksheet I use here.

Once you have your plan in front of you, it's time to begin your testing.

Start Testing

Now it's time to get started!

First select the pair and timeframe that you want to test.

Next, add any indicators that you'll be using to your chart.

Then scroll your charts back to a point in time that you want to start from.

If you are testing the H4 chart or higher, I would recommend going back as far as possible.

You can usually test all of the data for a Forex pair on a H4 chart or higher.

When testing lower timeframes, you should pick a few timeframes and test on those timeframes only. Pick a good mix of timeframes that have the following characteristics:

• Strongly trending market
• Strongly ranging market
• Neither strongly ranging or trending

That will give you a good idea of how your strategy will perform in different market conditions.

Do the following to scroll back quickly on your chart:

1. Turn off Autoscroll. This will stop the chart from moving to the most recent candle every time price changes.

2. Hit Enter on your keyboard to specify a start date. A small box will appear in the lower left corner.

Enter the date that you want to scroll back to on the chart in dd.mm.yyyy format, then hit Enter again.

You can also manually scroll back to the date on the chart that you want to start from.

Once you have scrolled back to the historical data that you want to start at, then hit F12 on your keyboard to move the chart forward, one candle at a time.

Record Your Results

Every time your setup fires off, place a trade and record it in the spreadsheet.

You don't have to take screenshots at this point because you don't even know if the strategy works or not.

So just keep testing as fast as you can, so you can get as much data as possible.

Creating screenshots will only slow you down.

Review Your Results

Now take a look at your spreadsheet and calculate the following:

• Win Rate (%)
• Return (%)
• Number of Trades
• Maximum Drawdown

This is enough data for now.

It will help you understand if you want to pursue this strategy or not.

If you want to be extra sure, do another round of testing to verify your results.

Sometimes you might be distracted or not in the right mindset when you do a test.

So if you get the same result with a second test, that will give you much more confidence that a strategy has an edge and you should move forward to the next step in your testing.

Test Another Pair

If you're satisfied with the results of a currency pair, then move on to testing another currency pair.

Not all currency pairs behave in the same way, so you can't assume that it will work on other pairs too. 

Some pairs are more volatile than others. Each individual currency is influenced by different economic factors.

You might be surprised at how differently a strategy performs with different strategies.

This is why you need to test each pair individually.

Be sure to record all of your rounds of backtesting on a separate spreadsheet.

Things to Avoid

Here are a few things to be aware of when doing backtesting with MetaTrader 5.

These tips will help you get the most out of your MT5 testing sessions.

Moving Too Fast Through the Charts

When you move too quickly through a chart, there's the tendency to move past an entry point on the chart.

That leads to hindsight bias because you already know what's going to happen.

If you already know how a trade will turn out, then you'll have biased data.

So find the testing speed that will allow you to get a lot of testing in, but also won't give you advanced knowledge of each trade. 

Changing Your Strategy in the Middle of a Test

It's really tempting to start tweaking your strategy in the middle of a test because you see a  new advantage.

But stick with the strategy, or you won't have a valid test.

When you change a strategy in the middle of the test, you won't know how good the original rules really are.

You also won't know how good the new rules are either because you are only doing a partial test with them.

So finish a test with one set of rules. Then create a new test with your new testing idea. 

Otherwise, your testing data is useless.

Stopping Too Early

If you win 10 trades in a row in the beginning of a test, you might be tempted to stop the test and call it a success.

Don't. 

The strategy may have just hit a really profitable streak that isn't normal for that strategy.

Stopping early won't allow you to see the entire picture and can lead to losses later.

Giving Up on a Low Return Strategy

It can be tempting to give up on a test if it's only returning 1% per year.

However, consider what would happen if you compounded that return with multiple pairs or timeframes.

If the strategy has a high win rate, it's certainly worth considering.

You might give up on an otherwise profitable strategy and find yourself jumping from strategy to strategy, when the first strategy would have met your goals.

Don't Keep Testing if the Results are Obvious

On the other hand, if it's obvious that the system doesn't work, then quit and save your time.

For example, if your strategy has lost 80% of the account, then it's probably time to stop.

There's no way you would continue with that strategy in real life.

Forcing the Strategy to Work

People also tend to be too optimistic about a trading strategy.

So they will subconsciously pass on losing trades and only take the winning trades, just to prove that the strategy works.

I was guilty of this when I first started backtesting.

When I reflect back on this, I did this partially because I wanted to get the backtesting process over with (and trade live) and I didn't like being wrong.

I'm not sure why others do it, but those were my reasons. They're very odd reasons in hindsight, because they didn't help me become a better trader.

But our actions aren't always logical and we need to continually reflect on our behavior to progress. 

Conclusion

Although backtesting can be very beneficial, not all strategies can be backtested. Learn more about this limitations of manual backtesting in this blog post.

But if you can backtest a strategy, it's a great way to test a trading idea, get hard data and build confidence in your skills. 

This tutorial will give you a good starting point, be sure to read the Complete Backtesting Guide for more details.

Once a strategy tests well, the Forward Testing Guide will show you how to take your trading strategy into the next phase of testing.

The post How to Do MetaTrader 5 Manual Backtesting appeared first on Trading Heroes.

Is the RSI indicator good for swing trading? Let's find out…

In this post, I'll show you my actual results from backtesting the RSI Divergence strategy on 27 currency pairs. The test had an overall +235.39% cumulative return, showing that this could be a viable RSI strategy for swing trading.  

But remember that good backtesting results do not guarantee success in live trading. Always test strategies for yourself, never trust anyone that says a strategy works (including me). You may have a different way of looking at the market, which will cause you to trade it in a different way.

Backtesting also helps to:

• Show you if a strategy has a historical edge and works for you
• Give you a reference point to compare your live trades
• Build your confidence in trading a strategy
• Give you practice with a trading strategy (even when the markets are closed)

Just to be clear, this was a manual backtest.

I might try to automate this strategy (or do Incremental Automation) in the future, but I was looking for a manual trading strategy, so that's how I tested it.

Alright, now let's get into the details…

The RSI Divergence Swing Trading Strategy

This strategy uses RSI Divergence to identify potential trades. To learn the basics of divergence, read RSI Divergence explained.

If you want the complete trading strategy plan that I tested, you can get it in this blog post. For a detailed description of how the RSI indicator works, read this blog post.

There are some trade entry filters that might make my entries different from how other traders trade it, so be sure to reference the strategy blog post if you have any questions.

I only tested this strategy on the daily chart.

Testing Tools

For this round of testing, I only used 2 tools:

• Forex Tester
• Numbers for Mac

Forex Tester speeds up the process by automatically recording your trades, calculating stats and gives you an easy way to download historical data.

Trading Heroes readers get a discount on Forex Tester. Click here to get your discount coupon.

You can also use other platforms like TradingView or MT5, but the process will be slower because you have to update a second spreadsheet to record your trades.

I only used Numbers to record the results of testing, so I could get totals and averages.

Historical Time Period

I tested each pair with as much historical data as I could get my hands on.

Most of the major currency pairs were tested from 2003. The crosses and more exotic pairs were tested from 2006, and a couple started as late as 2012.

That's the data that Forex Tester had available, so that's what I used.

Testing Time

Since this test was done on the daily chart, each pair could be tested in about 90 minutes. So the total test took about 40 hours. 

When testing the daily timeframe and higher, it's possible to test all of the data in a reasonable amount of time, so I do a complete test.

If I'm testing a lower timeframe, I usually “spot test” certain date ranges to get a good feel for how well the strategy works, without wasting time.

The most important thing to note here is that most trading strategies out there are easy to learn.

However, most new traders don't understand the additional work that goes into mastering a trading strategy.

Testing and practicing a strategy takes time. 

Anyone who tells you that you can learn a strategy today and be successful tomorrow is straight-up lying to you. 

So if you are serious about becoming a successful trader, you need to put in the time to test and practice.

Overall Stats

Before we start digging into the results from each currency pair, here are the overall stats:

• Average win rate per pair: 78.74%
• Average return per pair: 8.71%
• Average number of trades per pair: 14
• Total number of trades: 373
• Total return: 235.29%

Since this is a swing trading strategy, a lower number of trades per year is expected.

The yearly return may also seem a little low to some traders.

Before you write off this strategy however, consider this:

• You can always add more strategies later
• This might also work on lower timeframes
• You might be able to add more currency pairs
• You might be able to increase the return on each trade

But these initial results are solid and worth moving forward with. Now let's get into the specific results by currency pair.

Backtesting Results

Win Rate

First let's look at the win rate. The win rate for this strategy was pretty high, averaging about 79% per pair.

So this is potentially a good strategy for traders who like to win a lot.

In the future, I could test going for bigger wins per trade, but at a lower win rate.

However, for now, I like these results, so I'm going to move forward.

Total Return

Now let's look at the total return for each pair.

Again, these returns look low because if you divide each of them by the number of years tested, you get a really small number. However, if you add all of the pairs together, the average is about 13% per year.

Not too shabby for one simple swing trading strategy. Add a couple more strategies with a similar return and you can potentially beat many fund managers.

Of course, you could filter out some of the lower performing pairs, to potentially boost the performance of the strategy.

Number of Trades

Finally, let's take a look at the number of trades that were executed for each currency pair.

Some people may say that this isn't a valid test because there weren't enough trades per test to achieve a high enough level of confidence. There is some validity to that argument…if I only tested 2 or 3 pairs.

However, when you test the same strategy across 27 pairs, you can get a big enough data set to make some statistically valid conclusions. Since there were 373 trades in this round of testing, that's more than enough trades to warrant moving on to the next step of forward testing (or beta testing).

How to Get RSI Alerts

Luckily it's easy to setup alerts, when trading RSI. This means that you don't have to sit in front of your computer all day, in order to spot RSI trades.

There are 3 simple steps to using an alerts indicator for RSI divergence trading:

1. Install the indicator and set it to your favorite overbought/oversold settings.
2. When the indicator sends you an alert, but that currency pair on your watchlist.
3. Check your watchlist pairs at the close of every candle, if possible. When there is divergence, take a trade.

You can download easy-to-use RSI indicators here.

Final Thoughts on this RSI Strategy for Swing Trading

Since my testing shows that RSI Divergence is potentially a good swing trading strategy, the next step will be to put these into forward testing to see how well this works.

If you want to discuss RSI Divergence every week, join the private group. It's free and can help you find new setups and learn more about this strategy.

Remember not to trade this live, just because backtesting says that this is a good strategy. Backtesting does have its limitations, which I talk about in detail here.

Always do the forward testing step before going live.

The post RSI Strategy for Swing Trading: 27 Pairs on Daily Chart appeared first on Trading Heroes.

Alright, now it's time to see some real results!

Forget the “theories” that you see on other sites. Doing a complete test is the first step to finding out if a strategy actually has an edge.

In the first part of this series, I explained how the RSI indicator works.

Part 2 gave you 3 commonly taught ways to trade the RSI, with complete trading plans. These are methods that can be found on many free websites.

…now it's time to see what happens when you actually test these ideas.

Do these strategies really have an edge, or are they just trading myths?

Let's find out…

Before we get started, remember the Trading Heroes Keys to Backtesting Success:

1. Never trust what you read on the internet about trading strategies. What works for another trader may not work for YOU. So always test strategies for yourself and get hard data.
2. Always test your trading strategies before risking real money. 
3. Past performance does not guarantee future results. But successful trading is based on recognizing repeating patterns, so testing is essential to success. 
4. If your return with one strategy does not meet your goals, remember that you can add: markets, timeframes, pyramiding and/or more strategies. Don't give up on a consistent strategy just because the return is low. 
5. One little tweak in a trading plan can change it from unprofitable to profitable. So test different ideas. 
6. Trading strategies are easy to learn, but hard to master. You need to put in the work: testing, screen time, journaling and reviewing. 
7. Consistently profitable trading is an extremely valuable skill. If you can master trading, there's always the potential to trade other people's money (OPM). Don't give up just because you think that you don't have enough money. 
8. Your live trading results may vary from your testing results. Part of the learning process is to figure out why. 
9. You are 100% responsible for your trading results. These testing results do not guarantee success. 

If you have never backtested, read this blog post.

I tested these strategies with Forex Tester.

But you can also use other programs like MT4, NakedMarkets or TradingView.

RSICross Trading Strategy

The first strategy that I gave you was the simplest way to trade the RSI. This is the version that I learned way back when I was first learning to trade.

You can get the complete RSICross trading plan here. 

From a logical point of view, this strategy makes a lot of sense.

The RSI indicator detects instances where price is at an extreme…over the last X number of candles.

So it makes sense that you could probably catch a few price reversals that way.

But we're interested in data and not theories, so let's get into the numbers…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 102
• Win rate: 44%
• Return: -11.38% 
• Max consecutive winners: 3
• Max consecutive losses: 5

So if you followed this strategy from some random blog post you found on the internet, my testing shows that you would have lost over 11% over 16 years.

Obviously, it's good to know that the strategy doesn't have an edge, before you invest time, energy and money into the strategy.

Thoughts on the RSICross Strategy

This just goes to show that ideas that seem logical don't always work in trading.

It's really important that you test and find out for yourself. 

Even though this specific strategy didn't work, there may be other versions of this strategy could work.

Here are some ideas:

• One idea would be to increase the lookback period so trades are being taken on more extreme moves.
• Dropping down to a lower timeframe could also potentially improve results.
• Targeting a larger profit target can improve the return on some trading strategies.
• Using some sort of pyramiding technique could help this strategy increase the return per winning trade.

Stay tuned for more RSI tests in the future. 

Alright, now let's move on…

RSIDive Trading Strategy

The next commonly taught strategy is RSI divergence. I named this strategy the RSIDive, for my own testing purposes.

You can get the complete RSIDive trading plan here. 

I had done some RSI divergence testing before, so I knew that this strategy would probably show positive expectancy.

But you never know until you actually do the test…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 26
• Win rate: 73%
• Return: +12.8% 
• Max consecutive winners: 7
• Max consecutive losses: 2

Now we're talking! 

There are two things that you probably notice about these results.

First, the average monthly return is pretty low.

However, remember that this was just one currency pair on one chart timeframe.

You can test more pairs on more timeframes to potentially boost the overall return.

Second, this strategy looks quite reliable.

The win rate is high and it never lost more than 2 trades in a row.

That's fantastic.

Now that may not happen exactly in live trading, but the potential is there, based on historical data.

So all-in-all, this is a strategy that is worth testing further. I like this strategy and am currently doing more testing on it.

Thoughts on the RSIDive Strategy

Since this is a fairly high win rate strategy, there are things that could possibly be done to increase the return:

• Add a pyramiding element to the entry
• Increase the profit target
• Add a second position to capture the big runs

Keep an eye out for more RSI divergence tests in future blog posts.

If you want to sign up for the email list and be updated on future test results, click the button below.

You will also get a free book on how to choose the best trading strategy for your personality.

On to the next RSI trading strategy…

RSI50 Trading Strategy

The final RSI strategy is a little different.

This strategy uses the RSI 50 level, instead of the 70/30, like most strategies use.

You can get the complete RSI50 trading plan here. 

I've never done any testing with this flavor of RSI trading, so I didn't know what to expect.

It didn't make logical sense to me, but all that matters is the data.

So let's get into it…

Backtesting Results

(Screenshot from Forex Tester)

Here are the results from this specific trading plan:

• Currency pair: EURUSD
• Chart timeframe: Daily
• Number of days tested: 6,032
• Number of trades: 55
• Win rate: 71%
• Return: +26.05% 
• Max consecutive winners: 7
• Max consecutive losses: 3

OK, I was totally not expecting that!

I was almost sure that this strategy would not work.

It just goes to show that you can't make any judgements about trading strategies until you see some actual data. 

Thoughts on the RSI50 Strategy

Like with the other strategies, this one has a fairly low average return per month.

However, the return can potentially be increased by trading it on more pairs or more timeframes. You can also consider adding a pyramiding element to increase the return per trade.

Even though it was profitable, I'm personally not a huge fan of this strategy. I can see the potential to get whipsawed a lot because you really have to be in tune with the prevailing trend.

So I'm not going to develop this strategy further. 

This is just my own personal preference, at this time. I may choose to work on this strategy in the future. 

It's a perfect example of not trading every strategy out there. Only develop the ones that work with your trading personality.

If you're a trend trading personality and want to do more testing, fire up your favorite backtesting software and work on it yourself.

Conclusion

So two out of the three methods where profitable in backtesting on the EURUSD daily chart.

I wasn't expecting that.

It goes to show that backtesting is the most efficient way to find out if a strategy has an edge. Imagine if you invested hundreds of hours in a demo account to come to the same conclusion.

Backtesting speeds up the process dramatically. There are limitations to backtesting, however it is the best first step in your trading journey.

I'll keep on testing and share my results.

But remember…

My results don't matter. They are simply a starting point for your own exploration.

All that matters are the results that YOU get. After all, you will be the one trading your money…not me.

So take responsibility for your results and start testing for yourself. 

The post RSI Trading Strategy Results: 3 RSI Strategies Backtested appeared first on Trading Heroes.

There are a lot of opinions on the internet regarding what works in Forex trading and what doesn't.

But when you peel back the covers, one simple fact remains…

They are almost all opinions. 

My mission is to help you to stop relying on internet opinions and give you actionable processes that you can use to start to collecting hard data on what works for you. 

So in this post, I'm going to share with you my backtesting results from testing the Trending Pin Bar v2 strategy.

As with all Backtesting results, remember to be mindful of the limitations of backtesting.

This is a key step in the process of learning a trading strategy, but it cannot be used on its own.

Results Summary

This test turned out quite well.

Here's the breakdown:

• Historical data tested: Jan. 2001 to Aug. 2018
• Currency Pair: EURUSD
• Timeframe: 4-hour chart
• Win Rate: 78%
• Total Compounded Return: 446.13%

All backtesting was done with Forex Tester.

Keep in mind that this is just one currency pair. If this works for other pairs (which it may not), the total return could give me a very viable trading strategy.

The Rules of this Backtest

Pin Bars are touted by some online educators as simple trading signals that almost guarantee profits.

But nothing could be further from the truth.

They need to appear in the right place to be effective. Even then, your results will vary by how good you are at picking the right setups. This means that you need to get a feel for the price action before the Pin Bar and use your discretion before you enter a trade.

That said, I've tried to make my entry criteria as concrete as possible.

Here are the rules for version 2 of my trading strategy.

• 1% risk on each trade
• Looking for strong momentum in direction of trend before pin bar
• Tail of pin bar has to be at about 2/3 of total body
• Enter as soon as candle closes
• Set and forget, no moving stops
• Stop loss about 5 pips above/below pin bar
• Take profit at next major support/resistance level
• Pin bar should print on previous S/R level or poke out of consolidation area.
• 1 position per trade, no stacking
• Must have minimum 1R available
• If there are no reference points to set take profit, set it at 1R + 5 pips

Here's an example of a good short.

Results Breakdown

Once I have a good overall win rate and return, it's time to dive into some simple optimizations. An easy way to get this data is to throw it into Naked-Markets. But you can also use Excel.

Here what I discovered…

Day of the Week

The first thing I look for is if there is any correlation between day of the week and losses.

This graph shows that I should avoid Mondays because the return vs risk is very low. Every other weekday looks good, so I'm going to take trades on those days.

I'll monitor my live trading results to see if this actually lines up in live trading, but this is a good starting point.

Hour of Day

Next, let's see if there are any times of the day that I need to avoid.

As you can see, the time between 1900 GMT and 2300 GMT are times when I shouldn't enter trades. This equates to between 12:00 pm and 4:00 pm Pacific Time.

This makes sense because this is when New York is winding down and Asia is gearing up.

Max R Analysis

Finally, I want to find out how much profit I'm potentially leaving on the table. In order to figure this out, I'm going to do a Max R Analysis to see the maximum R that I could have got out of every winning trade.

Here are the results:

This graph shows me that I'm actually leaving a lot of potential profit on the table. The average maximum profit on all my winning trades was 6.7R.

I can use this information to potentially increase my profit targets and make more per trade. Instead of targeting a minimum of 1R, I will consider targeting a minimum of 2R.

I'll also have to look at the screenshots of these trades and figure out if there's a good way to trail a stop loss on these trades. I could use a support/resistance trailing stop or an indicator like the Parabolic SAR.

Conclusion

I'm sharing these results to show you the process of it takes to truly understand your trading strategy and develop rock-solid confidence in it.

All too many times, websites or courses show you one video on how to trade a strategy and expect you to trade it successfully.

That's impossible.

Just like any other skill, you need to start small and practice it, in order to become proficient. You can either do that by losing money in the live markets, or build a solid foundation through backtesting and forward testing.

If your Trading Personality matches a trending, swing trading strategy, then this strategy could be for you.

But don't take my word for it.

Backtest it for yourself and get your own data. 

You can use Forex Tester, TradingView, Metatrader or good ol' pen and paper. It doesn't matter which tool you use, just get started.

To get step-by-step tutorials that show you the entire process of backtesting and forward testing, join TraderEvo.

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The post Backtesting Results: Trending Pin Bar (TPB) on $EURUSD H4 Chart appeared first on Trading Heroes.