Evaluation of Forex Trading Strategies and Back Testing
The fundamental concept of forex trading is that if you adopt a proper strategy, forex strategy can surely be transformed into a great profit: this is true regardless of the currencies which are involved in forex trading and the prevalent market fluctuations.
The most important point in evaluation of forex strategies and back testing is that one should properly understand gaining money through forex trading can be elusive when you have a faulty plan and strategy while venturing into the forex market. The most effective forex trading strategy is the one turns out to be profitable most times. Back testing is the technique used to determine how well your strategy can be able to sustain the usual whims of the forex trading world.
In simple words, back testing just means that you need to apply any given trading strategy to any historical data of the forex trading market. Through this strategy, we can surely know how the parameters can safely guide you in your forex trading and the associated normal trends involved as far as performance of the market is concerned in the past. Thus, we determine the stipulations/ conditions that can successfully bring a robust change in these parameters.
The typical parameters of forex market include the time period that is counted in hours, days, and weeks. The other associated parameters will include expected profit per trade that is expressed in terms of percentage or number of pips. Moreover, we also have other parameters such as cumulative profit goal that is expressed in terms of 25 % annual return, currency pair in terms of USD/EUR, EUR/YEN, and the comfort with risk in terms of stop or loss. Furthermore, stipulations may be simple or complicated and this solely depends on your choice.
We can now explain things by taking an example. You intend to buy the moment you see the currency has deflected from its 15-day moving average. On the other hand, we also intend to sell the currency when we see that the stochastic has moved below the decent threshold. The types of stipulations that we encounter in these situations can be very qualitative. We explain this considering the Euro. Every time you go to sell a Euro to the European central bank, we need to know if the interest rates are lowered and only then do you plan to sell the euro. On the other hand, buying of Dollar will be done when the consumer confidence index reports a great rise.
The next important aspect is the method through which one can backtest any forex trading strategy. Today, things have become quite simpler thanks to computers and this also applies to backtesting. Thanks to computers, we are now saved of the manually checked procedure involving lot of data. That process basically involves going through the daily and weekly charts extensively to really undertand if there exists any viable strategy. Thanks to the software available for back testing, this has become a completed automated process.