In this tutorial, I'll show you how I backtest multiple timeframes at the same time.

You'll learn how to setup multiple charts and have them all run at the same speed while you backtest.

This is easy to do.

There are many software solutions that can do it, but it may not be obvious how to do it, if you don't know what to look for.

Here's what it looks like on my laptop.

As you can see, I have the Daily, 4-hour, 1-hour and Weekly charts open.

Having multiple charts running at the same time has many advantages, which you'll learn about in this tutorial.

If you want to learn more about backtesting in general, be sure to read my backtesting guide on how to backtest in any market.

Alright, let's get into it…

Why Backtest Multiple Timeframes at the Same Time?

There are many reasons that you may want to have multiple timeframes open at the same time.

I feel that most traders will benefit from watching more than one timeframe when backtesting.

First, when you have multiple charts open at the same time, you don't have to flip back and forth between the different timeframes to check things like pivot points, trendlines or support/resistance levels on higher timeframes.

This alone can save you a ton of time.

Another reason to use multiple timeframes is that you can take trades on all of those timeframes.

Let's say that you want to backtest the same trading strategy on the Daily, 4-hour and 1-hour charts.

Having the ability to take trades on all of those charts at once will be much faster compared to testing each timeframe individually.

Now, I've personally found this a little hard to do in the past.

But if you have Rules setup on each of your charts, then you can have your backtest pause every time a trading setup condition happens.

Finally, you can not only test multiple timeframes at the same time, but you can also have charts of multiple markets running at the same time.

I'll get into multiple markets in another tutorial, but for now, let's take a look at how to setup the charts.

How to Setup a Backtest With Multiple Timeframe Charts

I'll demonstrate how to do this with NakedMarkets because that's what I use.

But the process will be similar, regardless of which software you use.

This method also works in Forex Tester and other software.

First, open NakedMarkets and start a new backtest.

Select the settings for your backtest, along with the market you want to test.

Once you've finished the setups, you'll see a blank chart.

Now go to: File > Add new chart > [your current market]

This will add another chart.

If you want to add more timeframes, keep adding charts until you have all of the charts you want.

Then resize each chart so they all fit nicely on your screen.

You can also layer the charts if you want the charts to be bigger.

Now select each chart and change the timeframe to the one you want to display on that chart by clicking on the timeframe selectors in the toolbar.

You can see the timeframe of each chart in the upper left corner of the window.

Once you have setup the timeframes for each chart, select the timeframe that want to advance all of the charts at.

You can do this by selecting the Step timeframe in the toolbar, next to the Play button.

For example, if you select the 5-minute timeframe, all charts will advance in increments of 5 minutes.

Now click the Play button and the charts will move forward in unison, based on the timeframe that's currently selected in the Step setting.

To take a trade, simply right-click on any chart and enter a trade.

Since all of the charts are moving forward at the same speed, it doesn't matter which chart you take the trade on.

Your trades will appear on all charts at the same time.

It's usually best to select a low timeframe in the Step setting because that will show you the greatest level of detail across all the charts.

Doing this will also help you see what candles look like on the the higher timeframe charts, before they close.

Many times, traders don't wait until a candle closes before taking a trade.

This can lead to impulsive trading.

Watching a candle unfold will help you understand the emotions that you can potentially go through as the candles develop.

Alright one last thing…

You can add Rules to each chart to take trades or simply pause the chart every time your setup happens.

To do this, simply drag the Rule you want to use from the folders on the left, onto the chart you want to use it on.

Conclusion

Now you know how to do a backtest on multiple timeframes at the same time.

Using this method will save you a lot of time and help you find profitable trading strategies faster.

This can be done on many different backtesting platforms, so find out if your software can do it.

If your software can't do it, then consider using NakedMarkets.

It's what I use.

All that's left is to finish your first backtest.

Go for it!

The post How to Manually Backtest Multiple Timeframes at the Same Time appeared first on Trading Heroes.

Professional traders always backtest and verify their trading strategies before risking real money because their livelihood and in some cases, client money, is on the line. The average retail trader usually does not backtest their strategies and that is one of the biggest reasons that they are not able to make the transition to professional trading. 

Now that you understand the value of backtesting, I'll get into some examples of professional traders who backtest, tools you can use to backtest and the details of what backtesting does for professional traders.

Why Professional Traders Backtest

Professional traders backtest because they need to know if a trading strategy works or not. They also need to know detailed metrics about the strategy. 

It's like buying a used car.

Would you buy a used car without test driving it first?

Of course not.

In a similar fashion, a trader needs to “test drive” a strategy to find out if it has an edge. 

On top of that, backtesting gives a professional trader important information about the trading strategy.

Some of the key metrics that traders look at are: 

• Maximum drawdown
• Potential average monthly return
• Correlation to other trading strategies
• Volatility of the trading strategy
• Risk of ruin

Backtesting also helps professional traders determine the optimal position size, risk management strategy, and identify the ideal timeframe for their trades.

Examples of Professional Traders Who Backtest

Now you're probably looking for some examples.

There's actually no shortage of examples of traders who backtest, so let's take a look a few big names and one you may not have heard of before. 

If you want to learn more about these traders, do further research on your own.

Their history is fascinating. 

Richard Dennis

Richard Dennis was a highly successful commodities trader known for his Turtle Trading Experiment.

In the early 1980s, Dennis recruited a group of novice traders, taught them his trading methodology, and provided them with funds to trade.

These traders, dubbed the “Turtles,” achieved extraordinary success, demonstrating the effectiveness of Dennis's trading approach.

He was a pioneer in trend-following trading strategies and emphasized the importance of backtesting, discipline and risk management in trading.

Dennis' legacy continues to influence traders and investors worldwide, highlighting the potential for success through systematic trading methods.

Ed Seykota

Ed Seykota is a highly respected trader and pioneer in the field of computerized trading systems.

One thing that he's famous for is he used to backtest when computer programs were written on paper punch cards.

He gained fame for his exceptional performance as a trend follower and for his innovative use of technical analysis.

Ed is known for developing and implementing systematic trading strategies based on mathematical models and algorithms.

He was one of the original market wizards featured in Jack Schwager's book, “Market Wizards.”

Seykota's contributions to the field of trading, particularly in the realm of automated trading, continue to influence traders and investors worldwide.

Larry Connors

Larry Connors is a prominent trader, author, and educator known for his expertise in the field of short-term trading strategies.

He has authored several bestselling books on trading, including “Short-Term Trading Strategies That Work” and “High Probability ETF Trading.”

Connors is recognized for his research-based approach to trading and his focus on quantifiable methods.

He has developed numerous trading systems and indicators, particularly in the realm of high-probability trading setups.

Larry is highly regarded within the trading community for his contributions to the development of systematic trading methodologies.

I backtested one of his strategies here. 

Colin Jessup

Colin's story might be a little more relatable than the previous case studies.

He was working as a warehouse manager when he first started learning to trade.

From his humble beginnings, he was able to become good enough to be hired as a professional fund manager, managing a fund worth several million dollars.

On top of all that, he's a really cool guy and I had a lot of fun in this interview.

In this interview, he shares the role that backtesting had in his success.

There are Many More

But that's just a tiny sample of professional traders who backtest.

Do your own research and find more.

There are a ton of examples on YouTube.

Tools Professional Traders Use to Backtest

Professional traders use a variety of tools to backtest their trading strategies.

Some of the most popular tools used by independent professional traders include backtesting software such as NakedMarkets, MetaTrader 4, or TradeStation, and programming languages like Python or R.

These tools allow traders to automate the backtesting process, which saves them time and improves accuracy.

Spreadsheets such as Excel are also popular among professional traders because they allow traders to do custom data analysis.

When I worked at a hedge fund, they used Excel to track their trading results.

MATLAB and custom built software is used by institutional traders and hedge fund managers.

These are more sophisticated solutions that can do complex calculations and custom functions.

But regardless of the skill level you're at now, there is a backtesting solution for you. 

Conclusion

I'll say it again, professional traders backtest.

Period. 

It allows them to evaluate the effectiveness of their trading plan, indicators, and risk management.

Backtesting also enables traders to identify areas for improvement.

When backtesting, it's important to consider fees and commissions, as they can significantly impact your net profit/loss.

Optimization should be used cautiously, as over-optimization can lead to curve-fitting and poor performance in the future.

Finally, using backtesting software such as NakedMarkets and MetaTrader 5, can help you speed up your backtesting.

If you're new to backtesting, continue your education by reading this backtesting guide.

By incorporating backtesting into your trading routine, you'll dramatically increase your chances of becoming a professional trader too.

The post Do Professional Traders Backtest? appeared first on Trading Heroes.

There's a lot of argument about the minimum number of backtesting trades that you need to prove that a trading strategy really works.

Some say 30 trades…others say 100.

So who is correct?

The minimum number of backtesting trades that a trader needs to prove a that trading strategy works will depend on the timeframe the strategy is traded on, how often the strategy trades and how confident the trader is in the backtesting results.

In other words…it depends.

Since there isn't a single number that will work in all situations, I'll explain all of the factors that you need to take into account when figuring out what's the right number of trades for you.

Let's get into it…

The Myth of 100 Backtesting Trades

Before I get into what you need to prove a trading strategy works, I have to address a HUGE myth in backtesting.

I don't know where this myth came from, but it's one of the dumbest ideas in trading that many trading educators still perpetuate.

So if you're wondering why your trading isn't profitable, then this video will help you understand why a minimum of 100 backtesting trades doesn't make sense, in most scenarios.

If you prefer the text version, it's provided after the video.

Why a Minimum of 100 Backtesting Trades is Completely Ridiculous

Daylight savings time, measuring temperature in Fahrenheit and a minimum of 100 backtesting trades.

What do these things have in common?

They all don't make any sense.

Now in all fairness, I can see why someone might think that 100 backtested trades is a good number to use.

It seems about right…at least at first glance. You want to have a lot of data and 100 trades seems like a big number.

But when you really think about it, you cannot use 100 trades because that is usually too big of a number or too small.

It depends on which timeframe you're trading on.

Here are 2 examples from opposite ends of the spectrum that will illustrate my point.

When 100 Trades is Too Small

If you're backtesting a day trading strategy, 100 trades is not nearly enough to see if a strategy is reliable.

Let's say that you're backtesting a day trading strategy that averages 1 trade per day.

There are about 20 trading days per month. So if you have 20 trades per month, 100 trades will only represent 5 months.

That's not nearly enough to see how the strategy performed over several market cycles.

For example, here's the monthly chart of the S&P 500 from 1968 to 2024.

The thin vertical green box in 2013 represents about 5 months.

As you can clearly see, this a very, very small sample of the total amount of historical data.

So if you only tested during this small period of time, you won't know how well the strategy works in volatile markets, sideways markets, trending markets and quiet markets.

You might test in a really good period for the trading strategy, or you may catch a bad period.

In any case, you won't get an accurate representation of how well the strategy works over a long period of time.

When 100 Trades is Too Much

Now if you're trading on a longer timeframe like the daily chart, then 100 trades might not even be achievable.

You might not get 100 trades in 20 years.

But what if your strategy only gets 80 trades during that time and makes a ton of money on just a few trades?

This is common with trend following strategies.

They generally only produce a few trades a year, with 2 or 3 monster trades that more than make up for all of the losing trades, with a huge profit to boot.

In this case, would you insist on having a minimum of 100 backtesting trades?

Probably not.

Another scenario is if you're backtesting in a fairly new market.

It might be a cryptocurrency or a fairly new stock.

When backtesting in these markets, you might only get 30 trades.

What do you do then?

Well, it comes down to this…

How to Figure Out What's the Right Number for YOU

Now that you understand why 100 trades cannot be used as a minimum number of backtesting trades, the question becomes:

What is the best number of backtesting trades?

I wish I could give you a single, definitive number, but that's not how it works.

Like with a lot of things in trading, it really depends on the situation.

Traders need to feel confident that the backtesting results demonstrate that the strategy will work in many different market conditions.

So be sure that you have backtesting software that gives you detailed statistics on your backtesting. This is a big key to understanding how reliable a trading strategy is.

If you're day trading, you don't need to test your strategy for every single day over 20 years. But you do need to test chunks of time in different market conditions.

You may want to backtest a 1 year period in each of the following market conditions:

• Volatile market
• Quiet market
• Strongly trending market
• Weakly trending market
• Sideways market

On longer timeframe charts like the daily chart, you might want to test your strategy in multiple markets to gain confidence.

In Forex, you could test multiple currency pairs.

With stocks, you could test the strategy with many different individual stocks.

You get the idea.

Because there is no set minimum number of trades, you'll have to rely on how you feel about the results.

This will take some practice.

So when you're first starting out, don't start trading live right away.

Even if you think that you're confident in a strategy, start trading it in a demo account first. This is called forward testing.

If you get similar results in demo, then you can start trading real money.

After a few cycles like this, you'll get a feel for what good backtesting results look like and at that point, you may want to skip the demo trading step.

Conclusion

So that's how to figure out how many backtesting trades you need to prove that your trading strategy works.

You cannot say that there is a set number of minimum trades because it will really depend on the situation.

But of you follow the guidelines in this tutorial, you'll quickly get a feel for how many trades you need in each situation.

The post The Number of Backtesting Trades You Need to Prove a Strategy appeared first on Trading Heroes.

Nothing could be further from the truth. 

Sure, a proven trading trading strategy is important. But the reality is that there is so much more to profitable trading than just following a formula.

On top of that, there are other factors that many traders do not account for when choosing a trading strategy.

So this tutorial will show you what most traders miss and why trading strategy testing and optimization is so important. 

Not All Trading Strategies Actually Work

If a random man walked up to you on the street and told you that he has a trading strategy that will make you rich, would you believe him?

Of course not.

It would probably be smart to see what he has to say, just in case he is telling the truth. But I obviously wouldn't take him at his word.

I would test the strategy rigorously before I ever traded it live. 

Yet many new traders take tutorials on the internet at face value and never double check them. I've seen this a lot on forums and on YouTube. 

These traders jump from strategy to strategy, never actually testing the strategy, and they wonder why they are never successful.

I call this the Trading Silodrome.

So learning to test a trading strategy is vital to your success.

You need to figure out if the strategy actually works.

A Trading Strategy has to Match Your Personality

The most common reason that new traders fail is because they think successful trading can be boiled down to a simple formula (trading system), and if they just follow the formula, they will be successful.

That's only half of the story. 

A profitable trading method is certainly important.

However, the other half of the equation is to be sure that the trading strategy matches your personality. 

This is what most traders fail to understand.

So when you backtest a trading strategy, yes it should be profitable. But the most important thing that you can figure out is if it's the right strategy for you.

To put it another way, not everyone likes sports cars. You may like sports cars. But other people prefer trucks, motorcycles, or unfortunately…mini vans, as their primary form of transportation.

Trading strategies are similar in that some traders will prefer trend following strategies and others will prefer countertrend strategies. Some traders will prefer to day trade, while others like long term position trading.

This is because we are all born with different innate preferences and talents.

I think you already understand that in other areas of life. Some that come to mind are:

• Work preferences
• Finding a partner
• Taste in food
• And more…

The problem is that most new traders don't apply that same logic to trading. 

They never ask themselves if a trading strategy is something they like to trade or they think they could be good at.

When you backtest and forward test, you start to put a strategy through its paces and that gives you a chance to find out if it's for you or not.

It's like dating. You usually have to go on a few dates before you find someone you get along well with.

Treat trading strategies in the same way and it will dramatically improve your probability of success. 

You Need to be Able to Adapt Your Strategy to Changing Market Conditions

The reality of trading is that market conditions can change over time, and you need to be prepared for that.

Events like interest rate changes and monetary policy updates can have an effect on how a trading strategy performs.

I've personally discovered that some trading strategies in Forex don't perform well from 2003 to 2006, but will start to work from about 2007 onward.

You can see an example of how this works on the S&P 500 weekly chart.

There are times of strong trends, big dips and high/low volatility.

Therefore, if you trade the same strategy in all of these different market conditions, there will probably markets where your strategy won't work well.

There may be market conditions where you might actually lose a lot of money.

But when you properly backtest your trading strategy, you can find out when you should use it and when it might be a good idea to just sit on your hands.

This is extremely important because having this knowledge can be the difference between a profitable year and a losing year.  

Create a Diversified Portfolio With One Strategy

Here's a tip that not many traders talk about, but can have a huge positive impact on your trading results.

Even if a trading strategy is consistently profitable, there can be parts of the strategy that a trader doesn't like.

For example, let's say that a trading strategy has drawdown periods that are longer than a trader is comfortable with. Whenever this happens, many traders start looking for an entirely new trading strategy.

However, finding a totally new strategy may not be necessary. The downsides of a trading strategy can sometimes be reduced or possibly even eliminated by just tweaking the original strategy a little.

For example, let's say that you have a profitable trading strategy that targets 2R or 2 times risk. So for example, if you risk 100 pips on a trade, you would target 200 pips of profit.

Here's an example of a 2R profit target.

But maybe your win rate with this strategy isn't as high as you would like.

One thing you could do in this case is to test your strategy with a smaller profit target. A good place to start is 1R.

Therefore, you would reduce your take profit from 200 pips to 100 pips, if you had a 100 pip stop loss.

Here's how that would look on a chart.

If you backtest this strategy and it's shown to be profitable, then combine the backtesting results from your existing strategy to see how well they work together.

You might find that 2 versions of the same system, blended together, gives you a return that's better than either of them on their own. 

If that happens to be the case, there are a couple of ways that you can combine these strategies:

1. You can break up your trades into 2 parts. Take half of your trade with your original system, then take the other half with the modified system. So if you usually take 2% risk on a trade, you could take 2 trades with 1% risk each. You might even consider something like a 80/20 split, if that's possible.
2. You can alternate between the 2 strategies. So take your first trade with the original system, the second trade with the tweaked system, the original system on the third trade, etc.

There are other ways to use your new strategy, but those options are a good place to start.

Again, test it out and see what works for you.

Final Thoughts on Testing and Optimizing Trading Strategies

So if you've always thought that backtesting and optimization is unnecessary, I hope that this tutorial has convinced you that testing is one of the most important steps in successful trading.

It's like buying a used car. You're always going to take the car for a test drive to be sure that it works.

In a similar way, you always have to test a trading strategy before you start using it. You need to know if it has an edge or not. 

Optimization is also important because it can potentially turn an unprofitable strategy into a profitable one, or make a profitable strategy even more profitable. 

To get started with testing a trading strategy, read this. If you want to learn how to optimize a trading strategy, go here.

The post 5 Reasons to Backtest and Optimize a Trading Strategy appeared first on Trading Heroes.

I've kept my eyes out for alternatives, but nothing came close.

Then NakedMarkets was launched in 2022, and I instantly knew that it was a competitor. But how good is it, and more importantly, is it better than Forex Tester?

Both software programs help you speed up the manual backtesting process and make it easy to test almost any trading strategy in stocks, Forex, futures, cryptocurrencies, and more.

After spending several months backtesting with NakedMarkets, I'm finally ready to give you a complete comparison of the two.

I'll show you which ONE is better and why. 

[toc]

Ease of Use

Is the software designed in a way that makes it intuitive and so I don't have to learn new syntax or processes?

Both software are patterned after MetaTrader, so I would say that they are very similar when it comes to ease of use.

There are a couple of small differences however.

In version 5 of Forex Tester, they decided to move to a “ribbon” type menu at the top of the screen. If you've used Microsoft Office, you know what I mean.

This is what the menu looks like.

I'm not a fan of this.

It makes the menu bar bigger, and since each button is bigger, I have to flip through more menus to get to the functions I want to use.

In addition, the menus in Forex Tester 5 could be more useful. For example, the right-click menu on the charts don't have any options for trading.

Since there are already trading options on the primary ribbon toolbar, some might think that additional options on the right-click menu are redundant.

I disagree.

I feel that there should be some trading options on the right-click menu and the options for volume, grid, etc. should go on the Chart Settings menu.

On the other hand, the NakedMarkets menus are very well thought out and streamlined.

The buttons are small, so they don't take up a lot of space, and there are only the buttons that I use most often.

Creating a minimalist menu is actually more difficult than you may think. It's much easier to stuff it full of functions and let the users sort it out.

The right-click menu is much more practical than the one in Forex Tester.

What I like about this menu is that there are actual buy and sell order options.

There are many other ways that NakedMarkets is easier to use than Forex Tester 5…too many to go into here.

But there is one more function that makes NakedMarkets better than Forex Tester in this category.

This is the Rules Manager function in NakedMarkets. It's actually brilliant, I would have never thought of this.

It allows you to build pieces of your trading strategy so you can automate them and speed up the backtesting process. More on this feature later in this article.

NakedMarkets also recently launched a TradingView-like interface for their charts. I don't use it, but some traders love it.

It's just a personal preference. I'm happy that there is an option though.

TradingView has a great interface. Too bad it's not good for backtesting.

So even though Forex Tester 5 is easy to use, I have to give it a slightly lower score because of the ribbon menu and because the Rules in NakedMarkets really speed up the backtesting process.

Here are the scores for this category:

• Forex Tester: 4
• NakedMarkets: 5

Total Cost of Ownership

Cost of ownership may seem like a straight forward calculation, but it's not.

Here's why…

There are 3 parts to backtesting software ownership:

• Initial cost
• Historical data updates
• Additional feature add-ons

Everyone understands the initial cost.

This is the amount that you pay to unlock the full version of the software.

As this is being written, the regular price for Forex Tester is $299. However, they have a lot of sales and you can get it for $149.

On the other hand, NakedMarkets costs $269 up front, but you can get a $20 discount here, for a total of $249.

Before you jump on Forex Tester though, you also have to take into account the data plan and add-ons. 

The Forex Tester data plan costs $49.99 per month to get the latest updated data.

Now you could use the free plan, but there is a very limited amount of data available. So if you want to do any serious backtesting, you'll have to get the paid plan.

One thing you can do is order one month, download the data, then cancel your subscription. Then wait a few months, subscribe again for a month, then cancel.

Obviously, this solution is not ideal because you won't have the most updated data available. But it might be enough if you only backtest higher timeframes trading strategies.

The best solution is to purchase Forex Tester's lifetime data package so you never have to pay for data again. This package currently costs $539, on sale.

With NakedMarkets, you get updated historical data at no additional cost. So you only pay $249 (with the discount coupon), with no additional costs.

So when you compare apples to apples, you save $290 by purchasing NakedMarkets.  

Remember, pricing can change, so be sure to double check the prices before buying. 

Both are reasonably priced, but you do save a decent amount of money with NakedMarkets, so I'm giving NakedMarkets a slightly higher score.

Here are the scores for this category:

• Forex Tester: 4
• NakedMarkets: 5

Speeds up Backtesting

The next thing that I wanted to find out is how much each of the software packages can speed up the overall backtesting process.

Speed is relative. So what's the slowest method of manual backtesting?

Well, that would be manual backtesting with MetaTrader (and a spreadsheet), or using a notebook to do “paper trading.”

Both of these methods are very slow.

So one of the biggest benefits of using Forex Tester or NakedMarkets is that they speed up the process considerably.

But which one makes the process faster?

When it comes to basic backtesting, both software solutions are about the same.

However, when you start using the NakedMarkets Rule Manager, that's when you really start cooking with gas.

Rules in NakedMarkets allow you to automatically identify trade setups, entries and exits. It can also enter and exit trades and use set your risk management.

You can learn more about Rules in this video.

So while Forex Tester 5 is a solid solution, NakedMarkets provides another “gear” with their Rule Manager, which allows you to backtest much faster.

Here are the scores for this category:

• Forex Tester: 3
• NakedMarkets: 5

Data (Cost, Quality and Availability)

Up to date date is very important for backtesting because you want to see if your strategy is still working in current market conditions.

The biggest difference between the two products is that updated data in NakedMarkets is included, while you have to pay extra for it in Forex Tester. 

Otherwise, the data solutions are very similar.

In both cases, there could be more data available and some markets have spotty data. That probably isn't the fault of the software companies, it's most likely a function of the data feeds they are using.

But overall, both products provide solid data feeds. 

I'm giving NakedMarkets a slightly higher score because the data is included with the purchase of the software. 

Here are the scores for this category:

• Forex Tester: 3
• NakedMarkets: 4

Overall Stability

Let's face it, backtesting software is complex.

When I first started using Forex Tester around 2008, the program crashed often and it was buggy. Activating my license was a clunky process and I had to contact support if I wanted to change computers.

But that's how almost all software is at the beginning, and at the end of the day, it worked well enough to get in a solid backtest and develop trading strategies.

Over the years, it has evolved into a very stable product and now I hardly have any issues with it.

NakedMarkets launched in 2022 and the benefit of the software was obvious, after using it for a week. But since it's complex and very new, there are still a few bugs that they have to work out.

However, NakedMarkets has been really good at fixing bugs as they are reported. They also do frequent updates and are constantly improving the software.

Although NakedMarkets is improving quickly, I have to give Forex Tester a big edge on stability at this time.

Here are the scores for this category:

• Forex Tester 5: 5
• NakedMarkets: 3

Reporting

This is where there is a HUGE difference between the two products.

Huge is an understatement…they aren't even in the same galaxy.

The whole point of backtesting is to get stats on your trading strategy, so you know what to expect when you start trading it live. 

Therefore, analytics are extremely important. 

I've told Forex Tester in the past that they really need better reporting.

But unfortunately, they still have the same trading report that they've had since version 2.

As you can see, this report only shows balance, equity, margin and drawdown. There isn't a lot of data on this chart, but just look at the legend to see what the report is showing.

…and that's it!

Serious. 

To get a more detailed report, I always had to export the data to Excel and spend a lot of time “massaging” it to get the stats that I wanted.

Enter NakedMarkets…

Now that's more like it!

I get way more valuable information out of NakedMarkets.

…and that's just one tab on the report.

The other tabs are:

• Overall stats
• Symbols analysis
• Timing analysis
• Risk analysis
• Trades list
• Monte Carlo

To see a more detailed analysis of the reporting feature, read this article.

An added benefit is that you can also import reports from Forex Tester, Oanda and MetaTrader into NakedMarkets, and get detailed analytics, without going through the headache of exporting to Excel. 

It's a night and day different between the two software packages.

Here are the scores for this category:

• Forex Tester: 1
• NakedMarkets: 5

Automation

Next, I'll cover the amount of automation in each program.

Automation can dramatically speed up the backtesting process and any worthwhile software should have some sort of automation option.

Forex Tester 5 does allow you to backtest MetaTrader EAs, but that's all of the automation they have available.

Realistically, you can backtest MetaTrader EAs in MetaTrader, without paying additional money for Forex Tester. So that function in Forex Tester is useless. 

To be fair, Forex Tester does have their own proprietary “AI” function that supposedly optimizes your EA settings automatically. I haven't tried it and that could be useful. The downside is that it costs extra.

But again, you could simply setup a similar test in MetaTrader and it will run through all of the settings iterations that you give it. So again, including this in Forex Tester is not very helpful.

As I mentioned in previous sections, NakedMarkets has come up with an ingenious way to automate parts of the backtesting process.

On top of that, if all parts of your trading strategy can be automated, you can do a fully automated backtest.

But wait, it gets even better…

You can also backtest your fully automated trading strategy on multiple markets and multiple timeframes at the same time, with the Fast Backtest function in NakedMarkets.

So I think the winner here is obvious. NakedMarkets stands head and shoulders above Forex Tester 5 in the automation department.

Here are the scores for this category:

• Forex Tester: 1
• NakedMarkets: 5

Add Custom Indicators

I'm not a huge fan of custom indicators, but you might be.

So I'm going to go over how easy it is to import or create custom indicators for each of the software solutions.

Forex Tester 5 has an import function that will allow you to import MetaTrader indicators, if you have the source code. I've tried this function and it only works about half the time. 

Therefore, you might be able to get your custom indicator into Forex Tester, but you cannot add all custom indicators.

Now what about creating indicators from scratch?

I've tried to code my own indicators for Forex Tester in the past, but it's actually really difficult. Mostly because they don't have any documentation on it.

In order to get custom indicators, I had to hire a programmer who could do it. Luckily, I got a good programmer, but he was hard to find.

See the indicators he created here.

On the other hand, NakedMarkets doesn't have an import feature in the software, but they are working on it. 

In the meantime, you can actually ask them to do the conversion and they will help you as best they can.

They also have documentation on how to code your own custom indicators. There aren't many tutorials there yet, but all of their default indicators are open source, so you can see how they are coded and customize them to fit your needs.

C# and Visual Basic are used for coding NakedMarkets custom indicators, which is great because these programming languages are easy to learn. You can download a free software development package online (there are several options) and start coding in these languages.

If you don't want to code it yourself, you can easily find a programmer to do it for you because these are common programming languages.

So overall, I have to give NakedMarkets the edge here. Once they get their import feature online, their score will probably increase to a 5. 

Here are the scores for this category:

• Forex Tester: 3
• NakedMarkets: 4

Build Custom EAs

This is a big one for many traders. Their dream is to build an automated trading robot, or Expert Advisor (EA), so they can make money while they sleep.

So how easily do these solutions help you to do that?

Let's start with Forex Tester 5. They have created an external website that helps you build EAs with a no-coding, and a drag and drop interface.

Once you've built a EA on the website, you can export it to MT4, MT5, or Forex Tester formats.

Sounds good in theory.

The reality is that you can't build a usable EA on their website. The interface is too rudimentary and it's hard to build even the simplest trading system.

On top of that, you have to pay money to use their website.

It's a pretty big fail.

NakedMarkets, on the other hand, has the functionality to build an automated trading strategy built in to their software.

Use the Rule Manager and you can build partially automated or fully automated strategies. The Rule Manager is also a no-code solution, so you don't need advanced programming skills.

No external websites or additional fees necessary.

The only downside to NakedMarkets is that you cannot export the strategy to MetaTrader format. But they are working on that and will hopefully have a solution soon.

On the upside however, once you've created an automated strategy in NakedMarkets, it's easy to hire a programmer to convert it into a MetaTrader EA.

Here are the scores for this category:

• Forex Tester: 1
• NakedMarkets: 4

Support

Support is very important, especially with complex backtesting software. 

There are basically 2 types of support:

1. Day-to-day support: How quickly do they answer emails and are they helpful?
2. Long-term software support: Do they listen to feedback and improve the software with each new version?

I've found that both companies do a great job with day-to-day support.

No complaints there.

However, NakedMarkets has a huge edge when it comes to long-term product support. 

There are some features that I've been wanting to see in Forex Tester (like professional-level reporting) for a long time.

But they haven't really upgraded the product since version 2. It's still basically the same program. It's more stable and has a few more bells and whistles, but it's still very basic.

On the other hand, NakedMarkets has been fantastic about fixing bugs and adding requested features.

I leave a post on their forum and they usually get back to me within a few days, with a solution.

They are very good about adding suggested upgrades to the software and fixing bugs quickly. 

The most recent addition they have made is the implementation of a TradingView-like interface. So now traders can choose between a MetaTrader-like experience or TradingView controls.

They have also added a few features for me, which I greatly appreciate.

So in terms of overall support, NakedMarkets is much better.

Here are the scores for this category:

• Forex Tester: 3
• NakedMarkets: 5

Review Video

Watch the complete video review below.

I show you some of the differences in action and why I gave the scores I did.

Final Score

Now let's add up all of the scores and find out which software package is the winner…

As you've probably already guessed, NakedMarkets comes out way ahead of Forex Tester by a margin of 17 points.

• Forex Tester 5: 28 points
• NakedMarkets: 45 points

Forex Tester had the first mover advantage, but they have rested on their laurels and are now going to have to play catch up to NakedMarkets.

Like I mentioned before, Forex Tester hasn't really changed much since version 2, it just became more stable.

Many of the upgrades that they have added over the years have had questionable utility and I've always had the distinct impression that the product was being designed by programmers…not traders.

On the other hand, I personally know the creator of NakedMarkets and I know that he's a legit trader too. That's why he has added features to the software that are actually useful to traders.

There are many benefits to NakedMarkets, but what I like best is its ability to backtest fully manual, partially automated and fully automated trading strategies. It will only get better with time.

Get NakedMarkets here.

If you want to see a trading strategy that I developed with NakedMarkets, go here.

The post Forex Tester 5 vs NakedMarkets: Here’s the Winner appeared first on Trading Heroes.

To properly backtest a day trading strategy a trader must create a trading plan, choose the right software, monitor trading expenses, test the correct historical periods, and do a detailed analysis of the results.   

I'll also share with you how to figure out when it's time to start trading a strategy live, as well as the best tools and resources that you can use to start backtesting.

Now let's get into the details of each aspect of the process.

[toc]

Create a Trading Plan

The first step in the process is to create a detailed trading plan.

A trading plan must consist of the following:

• Entry criteria
• Risk or lots per trade
• Where to place your stop loss
• When to exit the trade
• How to trail your stop loss (if applicable)

You should write down your plan on a piece of paper or in a digital file like a Word Document.

Reference this trading plan every time you're about to enter a trade in backtesting.

It will help you remember the rules of a trading strategy and you'll be less likely to make a mistake.

If you want a downloadable trading plan worksheet, you can get it here.

How to Choose the Right Backtesting Software

The next step is to choose the software that you're going to use to backtest with.

There are many options out there, but the best option for you will depend on 3 primary factors.

Manual or Automated

Many new traders want to start off with automated backtesting so they can backtest a ton of data very quickly.

That's ideal…in theory.

In reality, most trading strategies cannot be 100% automated because there are certain criteria that rely on trader discretion and not on purely robotic steps.

On top of that, most people don't have the skills to start programing trading systems.

Therefore, it's generally best to start with manual backtesting.

If you really want to do some automated backtesting, find a backtesting platform that allows you to do partially automated backtesting and does not require coding.

That will allow you to get started quickly and you can step up to learning to code later.

What if you are already a programmer?

Then you're ahead of the game. Look into using languages like Python to automate your backtesting.

The Market You Trade

Some software programs are specifically built for certain markets. If you use them to backtest other markets, they might not work as well.

For example, Amibroker is great for backtesting automated stock trading strategies. But it's not good for backtesting in Forex.

Forex Tester works very well for backtesting Forex strategies, but it's not as good for testing strategies in futures trading.

So look for the best software for the market you're going to test.

Cost of Software and Data

The great thing about trading is that there are many tools available for big and small budgets.

If you want to keep your costs low, you can go with a free platform like MetaTrader 5. It usually provides a decent amount of historical data and the software is easy to use.

On the downside, these free programs are very bare bones and you won't get features like detailed reporting, which can save you a lot of time.

To get more time-saving features, you can use platforms like NakedMarkets or MultiCharts.

In my opinion, it's best to pay up for a professional quality software package. They save you a lot of time and time is the only thing you cannot get back.

Now let's talk about data…

Sometimes these backtesting platforms don't provide enough historical data. Luckily, you can download the data separately and upload it to your backtesting platform.

Amibroker allows you to download data from free websites like Yahoo Finance.

Vendors like TickData provide data files that aren't cheap, but they have complete data for most major markets.

Download as Much Historical Data as Possible

Once you've chosen the best software for your backtesting, now it's time to download historical data for your backtesting.

Many backtesting software packages have the ability to download data from their own data source, or upload third party data files.

Regardless of where you get the data from, you want to have as much clean data as possible.

This is because you should backtest in different market conditions, such as:

• High volatility
• Low volatility
• Strongly trending markets
• Weakly trending markets
• Ranging markets
• Unusual news events

The 2 highlighted areas on this AUDCAD chart illustrate very different market conditions.

Area 1 is a strongly trending market and your strategy could perform very differently in that market, compared to area 2, where the market is ranging.

So it's important to have as many historical scenarios as possible.

There's a common myth on the internet that if a trading strategy is profitable after 100 trades, then it will work in live trading.

That's simply not true and 100 trades is certainly not enough to backtest a day trading strategy.

If you only backtest 100 trades, that usually won't cover more than a few weeks.

Here's a video that demonstrates why 100 trades isn't enough.

In reality, you should test as many trades as possible.

But it isn't feasible to backtest ALL of the trades in your historical data because there are so many potential trades with a day trading strategy.

The solution is to pick specific time periods that represent the different types of market conditions mentioned above.

If this is your first time backtesting a day trading strategy, then I would suggest picking a few 2-week periods to start testing.

Start with one 2-week period in a volatile market, one period in a ranging market and a third 2-week period in a random market.

This will give you a good feel for if a trading strategy has an advantage or not.

You should obviously do more testing than that later, but backtesting a day trading strategy can be overwhelming.

Starting with a few short periods will help you get into the flow and understand the process.

Backtesting in a few short historical periods will also save you time. 

You could spend a lot of time backtesting several months in the same market condition, like a trending market.

That wouldn't help because you won't know how the system performed in a ranging market.

When you test short periods in different market conditions, that will give you a better idea of how your strategy will work overall. 

Monitor Trading Expenses

There are 3 types of trading expenses that should be taken into account when backtesting a day trading strategy.

1. Spread
2. Slippage
3. Commission

Whenever you're backtesting a day trading strategy, it's very important to take these factors into account because they can have a big effect on the profit of every trade.

For example, if you scalp in Forex, your biggest winners may be only 10 pips. Let's say that the average spread in the currency pair you're testing is 2 pips. If you don't factor in the spread in backtesting, then your strategy will be at least 20% less profitable than your backtesting shows.

There are different ways that you can factor in the expenses in a trade.

If you use a spreadsheet to record your backtesting trades, then you can add a column for expenses. Be sure to use accurate expenses if you use this method.

You can get spread and commission numbers from your broker.

To get approximate slippage numbers, take a few trades in a demo account at your broker, if possible. Be sure to take several demo trades at the time you'll be trading to get a good slippage estimate.

An easier way to estimate your trading expenses is to use backtesting software.

Many professional backtesting software solutions factor in the spread automatically and allow you to manually set slippage and commission in the settings of the software.

For example, NakedMarkets shows the current spread at the bottom of the screen.

This spread changes on every candle, according to the spread data in the file.

In the settings for each symbol, you can also set the spread and commission manually.

This is just one example, but other software packages have similar features.

Regardless of which method you use for backtesting, factoring in your trading expenses is vital in backtesting day trading strategies.

Backtest at the Right Times

Another important factor to take into consideration is the hours of the day that you take trades in backtesting.

Track the times that you'll actually be trading. If you take trades in backtesting that are outside of your normal trading hours, then your backtesting results will be inaccurate.

For example, if you take backtesting trades during the time you're normally sleeping, then there's no way that you'll be able to take those trades in real life.

The easiest way to track market times is to mark the market hours on your chart while you're backtesting.

Many backtesting platforms have the ability to do this.

For example, in NakedMarkets, you can add an indicator that marks the major Forex market open and close times.

If you use MetaTrader 5 to do manual backtesting, I've come up with a simple custom indicator that allows you to mark specific times on your chart.

This indicator will mark the same time every day on the 1 hour chart or lower. It can also send you alerts to your phone when the time period starts.

In this example, the marker shows the London open.

Backtest Honestly

Now that you have a trading plan, backtesting software, data, and you know when to backtest, it's time to get to work testing.

If you backtest manually, do not move your chart forward to quickly. You don't want to pass a trading entry and have future information about a trade.

Even worse, some people will move their chart forward a few candles to see how a trade would have worked out, before taking a trade.

When you're doing manual backtesting, do your best to simulate real trading conditions and don't overshoot your entry.

Automated backtesting can also have pitfalls.

When you're optimizing an automated trading strategy, optimize your strategy on one set of data. But do more testing on other sets of data to be sure that you haven't over optimized your strategy to the test data.

For example, if you optimized your strategy in the years 1999, 2004 and 2019. You should also test your strategy in other years like 2003, 2008 and 2013.

Don't optimize over all years in your data file. 

Obviously, you should test during more years than that, but that's just a small example of how you shouldn't optimize your strategy on your entire data set.

Analyze the Results

Once you've completed your first round of backtesting, now it's time to review the results.

If you're using a spreadsheet, then calculate the vital statistics on your spreadsheet.

• Win %
• Maximum drawdown
• Maximum number of losers in a row
• Short win %
• Long win %
• Average Win / Average Loss
• Graph of your performance

It can take some time to compile this information, but it's worth it.

If you use backtesting software that has built-in reporting, you'll save a lot of time because you won't have to manually calculate your statistics.

Here's a sample of the stats that NakedMarkets provides.

What to Avoid When Backtesting Day Trading Strategies

There are 2 main things to avoid when backtesting intraday strategies.

First, avoid trading software that doesn't have many years of backtesting data.

I love using TradingView as a trading and charting platform.

But as this is being written, it does not have enough historical data to do a proper backtest for a day trading strategy.

This may change in the future, but as it currently stands, they only provide a couple of years of data.

Second, avoid very complex trading strategies. They are hard to test and it can be easy to miss entry criteria when taking trades.

Complex strategies also have a lot of moving parts and those types of strategies tend to break down over time.

In general, the simplest trading strategies tend to work the best because the take advantage of basic principles of market dynamics.

If you avoid these 2 common mistakes, you'll have a much higher probability of finding a strategy that works over the long haul.

How to Know When You Should Go Live With a Strategy

Once you've tested a strategy, you might be wondering if it's good enough to trade live.

That's going to be a personal decision and it's up to you to determine if the strategy meets your goals and if you have enough confidence in it to risk real money. 

If you currently don't have a fully tested trading strategy, then it can be a good idea to start trading a strategy that has an edge, until you find a strategy that has better performance.

Even if a strategy doesn't have a huge return, you can use the power of compounding to build up your account while you test other strategies. 

But again, the final decision is up to you.

How Day Trading Backtesting is Different from Backtesting a Swing Trading Strategy

Backtesting a day trading strategy requires much more focus and diligence.

Expenses will have a much bigger impact on the profitability of a day trading strategy.

With a swing trading strategy, you don't have to worry about expenses as much and there is a larger margin for error.

However, there is a much higher potential to build your account quickly with a day trading strategy.

You could do both.

But you have to match your trading timeframe to your personality. Some people cannot handle day trading and others find swing trading too slow.

So take your personality into account and don't only try to make money quickly with day trading.

Final Thoughts

Backtesting is the best way to prove that a trading strategy has an edge.

If a strategy worked in the past, then it's very likely to work in the future.

Of course there's no guarantee that the strategy will work in the future. But if it never worked in the past, then there's no way that it will start magically working in the future.

I see way too many new traders take random trading strategies from the internet and start trading them with real money.

Just because someone on YouTube speaks with confidence and tells you that a trading strategy works, does not mean that it will actually work.

On top of that, the strategy may work for them, but it may not be a good fit with your trading personality.

So backtest everything for yourself. If you get positive results, then open a demo account or small live account and forward test the strategy.

If that goes well and you have confidence in the strategy, then you can start trading with your full account.

That is how you backtest a day trading strategy properly.

The post How to Backtest Day Trading Strategies appeared first on Trading Heroes.

As a general rule, you should backtest a trading system for as long as it takes for you to have confidence to trade the system with real money. 

In other words, it depends on a few different factors.

Let's dive into what you should know about backtesting and how long you should do it.

It all begins with defining our terms…

The Definition of “Long”

The first thing that I have to clarify is the what is meant by “long” because there can be some confusion here.

There are different interpretations of this word, so here are the definitions that I'm going to cover in this post.

• Length of time spent backtesting
• Amount of historical data used
• Number of backtested trades

When we look at the 3 definitions, we realize that “long” can mean entirely different things.

So I'll address each one to clear up any confusion, and show you which ones really matter.

Length of Time Spent Backtesting

Like with many things in life, the amount of time that you spend on backtesting isn't an indicator of the quality of work that was done during that time.

Therefore, the idea that you have to spend a minimum amount of time backtesting is not useful.

In an extreme example, you could backtest for 4 months, but only have 2 backtested trades.

That wouldn't tell you anything about how profitable the trading strategy is.

So when you're looking for a minimum amount of backtesting to prove a trading strategy, you need to throw out the idea that the act of backtesting should be done for a certain period of time.

Amount of Historical Data Used

Another way to measure the amount of backtesting a trader does is to track the amount of historical data used in the test.

In other words, you could backtest a system over 3 years or 30 years of historical data.

Obviously, more data is better.

When you have a lot of historical data, you'll know how your trading strategy would have performed over many different market cycles.

This is very important in finding out if you have robust trading strategy or if your trading strategy only works in certain market conditions.

For example, if your trading strategy wasn't tested during the 2007 financial crisis, you wouldn't know what would happen in an extremely volatile market.

So while the amount of historical data you use to do your backtest is an important factor in determining a valid test, there's one more things that you have to consider…

How Many Times Should You Backtest a Trading Strategy?

That brings me to the final backtesting measurement…

The most useful metric to look at is the total number of backtested trades.

If you tested a trading strategy over 300 trades, that would be a lot more reliable than if you tested the strategy over only 10 trades.

That's pretty obvious.

But what's not so obvious is the minimum number of trades that will give you confidence in the system you're testing.

There can be a gray area where you're not sure if you have enough trades in your test.

When you're in doubt, zoom out and consider the bigger picture.

Think about a day trading strategy…

If you only test 100 trades, then you might only have 2-3 months of data. That's not nearly enough to get a good idea of if the strategy is reliable or not.

Even 500 trades might not be enough.

You don't necessarily have to test every single day for the past 20 years, but you should have samples from different market conditions.

There should be trades from:

• Volatile markets
• Quiet markets
• Trending markets
• News shock markets

The more trades you have from each of these types of markets, the more confidence you'll have in your strategy.

Now consider a swing trading strategy…

With a swing trading strategy, you might have a relatively low number of trades in your backtest.

For example, let's say that you backtested the RSI Divergence trading strategy on the daily chart of the EURUSD.

With this trading strategy, you might only get 25 trades over 20 years.

So does that mean that you throw out the strategy, even if it was profitable?

Of course not.

But you might not have enough confidence in it to trade it live.

In that case, it's important to forward test the strategy until you get to a point where you're confident that the strategy works.

Forward testing will take some time.

But it's the best way to gain confidence, when you have only have small amount of data.

You could also test the strategy on other markets and timeframes.

If you find other instances where the strategy works, that can also give you more validation that the strategy is reliable.

The 100 Trades Myth

There's a meme on the internet that you need a minimum of 100 backtested trades to prove that a strategy works.

That's simply not true.

100 trades is nice number of trades to have.

But again, the number of trades you have in a test only tells you part of the story.

Here's what you need to know about the 100 trades myth…

The biggest issue with setting a blanket minimum number of trades is that it doesn't take into account the timeframe being tested and the behavior of the specific market.

Some statistics professors might tell you that you need a minimum of 30 trades to prove that a trading strategy works.

Others will say 500 trades.

In all fairness, that's a good place to start, from a strictly mathematical point of view.

But in reality, there's a lot of variability between markets, market cycles and trading systems.

What worked in one market or cycle probably won't work in another.

That's why you should be conscious of all of the factors, not just the number of trades alone.

Final Thoughts

So that's what you need to know about how long you should backtest.

There isn't one simple answer to this question.

On the surface, you could say that you should have as many backtested trades as possible, over as long a historical period as possible. 

But you have to take into account the nuances.

You need to consider your trading strategy, your goals and your level of confidence in your testing.

Not to worry though, once you start backtesting, you'll get a feel for what's reliable and what's not.

Just get started.

Learn more about backtesting in these posts.

The post How Long Should You Backtest a Trading System? appeared first on Trading Heroes.

A trading strategy is considered profitable if it has a positive result in backtesting and/or forward testing. The results have to meet the return requirements of the trader, and go through a series of filters to be sure that the results are an accurate representation of real world trading conditions. 

That's a mouthful, so I'll break down everything in this tutorial.

I'll get into how to define a profitable strategy and how to do the testing to figure out the performance of a trading strategy.

Then you'll put those 2 elements together to find out if a trading strategy really is profitable or not.

Backtesting

The fastest way to figure out if a rules-based trading strategy is profitable is to backtest it. 

Backtesting can be done in any trading market.

When you can see that a trading strategy has a profitable track record over a long period of time, that's the best indication that a strategy is likely to work now and in the future.

Some people think that you need to know how to code a computer program to backtest.

That's simply not true.

You can do both manual and automated backtesting.

Anyone can backtest.

This software makes manual backtesting easy.

You can also use free charting platforms to backtest.

It's just a matter of which one is easier for you.

All profitable traders look for trading strategies that have a historical edge in the markets. 

Once you've proven that a strategy would have been profitable in the past, you'll also have key data on how that strategy performs.

You'll know things like…

• The maximum number of losing trades in a row
• The average monthly return
• The biggest drawdown
• Market conditions when the strategy works and when it doesn't
• And more

All of these data points allow you to make important decisions about the trading strategy, which I'll get into more detail later in this tutorial.

Think about cars…

We all know that certain makes and models of cars last a long time and others break down quickly.

The reason we know this is because we have historical data that shows the reliability of these cars.

For example, Toyotas are generally very reliable cars.

On the other hand, Fiats are notoriously unreliable. So much so, that many people say that Fiat stands for “Fix It Again Tony.”

If you purchased a car from a company that just started producing cars last year, you wouldn't know how reliable those cars are because they don't have a track record.

So you're taking a big risk.

In a similar way, you need to know the track record of a trading strategy before you risk real money. 

Again, backtesting is the best way to do that.

If you've never backtested before, this beginner's guide will show you how to get started and the best tools that you can use.

Backtesting also gives you one of the most important traits that a trader can have…resiliance. 

When you take a trade, you have a high level of confidence of your probability of having a winning trade.

You won't know exactly how each individual trade will work out.

But you'll know that if you take a lot of trades, X% of your trades will be profitable. 

The fastest way find that X% probability and your expected return is through backtesting.

Knowing the backtesting statistics of a trading strategy also helps you when you're on a losing streak.

All trading strategies will have a losing streaks, but you want to be able to separate a normal losing streak from a situation where your trading strategy may have stopped working.

For example, let's say that you had a maximum of 7 losing trades in a row in your backtesting.

That's normal for that strategy.

But when some traders start trading live, they freak out when they have 3 losing trades in a row and think that their system is broken.

If they have backtesting data and they reviewed their maximum losing trades in a row, they would realize that 3 losing trades in a row is well within the normal parameters of the strategy.

There's nothing to be worried about.

The same thing goes for the other data points you get in backtesting.

Therefore, having this data gives you the confidence to keep trading when you hit a rough patch. 

Forward Testing

Another way to figure out if a trading strategy is profitable is to forward test it.

This basically means that you open a demo account or “paper trade” to build a track record on a trading strategy.

Never risk real money when forward testing. 

The primary advantage of forward testing is that you'll know if a trading strategy works right now, in real-time.

On the downside, it can take a long time to collect enough data to determine if a trading strategy works or not.

I see so many new traders making the mistake of forward testing a trading strategy that they just learned, with real money and a full-sized account.

They believe that a trading strategy works because someone told them that it works.

Then they wonder why they lose money.

Never take someone's word that a strategy works, always test and verify.

If you're only going to forward test, then you need to have enough trades to give you confidence that a strategy is profitable.

Some people online say that the minimum number of trades that you need to have a properly tested system is 100 trades.

That's not true.

I talk about how to figure out the minimum number of trades in this video.

The video talks about backtesting, but the same concept applies to forward testing.

Alright, once you have a number of trades that you're comfortable with, then it's time to move on to the verification stage.

Double Check the Results

Once you have data on your trading strategy and it's profitable, then it's time to take a step back and consider if you're missing anything.

There can be assumptions that you made in testing that would not carry over to live trading.

Broker Quotes

For example, if you use data from Broker A, then you start trading live with Broker B, you might get very different results.

The reason is because the Forex market is decentralized.

So each individual broker has slightly different price quotes.

Historical data will affect lower timeframe strategies more. The slight difference in quotes usually won't have a huge effect on trading systems on the daily chart or above.

But shorter term trading strategies are more sensitive to differences in quotes because the margin for error is much smaller.

Stop losses and take profits are smaller and therefore, any deviation in price will have a larger effect on the profit and loss of every trade.

Spread

Another common thing that people overlook in testing is the spread.

This is especially true in backtesting.

If you don't factor in the spread on every trade, your strategy will look much more profitable that it would actually be in live trading.

You might think that this is common sense, but you would be surprised at how many people overlook this.

But don't stop at these 2 examples. Think of all of the things that could be different between your testing and live market conditions.

Once you're satisfied that your testing results are a good representation of live trading conditions, then it's time to ask yourself an important question…

Figure Out YOUR Definition of Profitable

Now we get into the big question…

What's your definition of profitable?

That might seem easy to answer, but it's not.

I'll start with an extreme example to illustrate my point.

Let's say that you backtested a trading strategy over a 20 year period and it made a total of 5%.

So if you started with $10,000, your total profit would be $500, or an average of $25 pear year.

Is the trading strategy profitable?

Of course.

But is it profitable enough to make a living on?

No way.

Therefore, I would not consider that trading system profitable.

I would lose money on that trading strategy, when I factor in the profit that the system produces in relation to the amount of time that I would have to spend on it.

So there are a few elements to consider when creating your definition of profitable.

• Average return per year
• Amount of time you'll spend trading the system
• Drawdown
• Risk of ruin
• Real world performance

It's all a matter of what's important to you, how much risk you're willing to accept and the return you want to make.

Everyone would love to make 800% per year, but could you handle the risk that came with that return?

For most people, the answer is no.

That brings us to another important question…

How Much can You Realistically Expect to Make Per Year in Trading?

When you first get into trading, it can be tough to know what's possible in terms of consistently and return per year.

So the best way to figure this out is to look for as many data points as possible.

Listen to interviews with professional traders.

Take a look at track records of trading systems that are similar to the one you're testing.

That will give you an idea of what's possible and probable.

…and it will give you more confidence.

Final Thoughts

That's the complete guide on how to figure out if a trading strategy is profitable or not.

As you can see, the idea of “profitable” is very much a relative term. 

What you think is an acceptable level of profit could be very different from what I consider acceptable.

You also have to factor in the risk and consistently of the strategy.

So first define the amount of profit you want get out of your live trading strategies.

Ask yourself if that number seems realistic, based on what you've seen from live trading results of similar strategies.

Then test the trading strategy so you have as much data about the strategy as possible.

From there, simply compare the results of your testing with what you feel is an acceptable return.

In real world trading, there is no magic profit number.

It's up to you to make the call.

If a trading strategy meets your criteria, then the next step is to open a small live account and start trading the strategy.

Trade the strategy for a few months to see if your live trading results are similar to your testing results.

Only move the strategy into a full-sized account after it performs well in the small account.

Alright, that's your blueprint, now get to work!

The post How to Know if a Trading Strategy is Profitable appeared first on Trading Heroes.

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.