TESTING YOUR ONLINE FOREX TRADING STRATEGY BEFORE COMMITTING YOUR MONEY

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It always amazes us to see people who have attended a course, read a book or magazine about a trading technique and then go straight into live trading with that technique. In Forex trading it is important that you make any trading technique your own. You do this by thoroughly testing the technique many different time spans and market conditions so that you are aware of its strengths and weaknesses. Below are some checklists on the important aspect of trading:-

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1. The purpose of back trading, paper trading and having post mortems (post transaction analysis)

1.1. Learning to apply the trading strategy in diverse trading conditions
1.2. Reduce the risk of losses and trading errors when trading live
1.3. Learning the nature of the Forex market
1.4. Optimizing the strategy or methods used
1.5. Building confidence
1.6. Creating Competence
1.7. To ensure all eventualities are taken into account
1.8. Making it automatic and spontaneous to spot opportunities

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2. Back trading techniques (Using history to simulate live trading)

2.1. Using the time frame that will be traded referring to shorter time spans when appropriate
2.2. Using candles reflecting the highs, lows, opening and closing prices.
2.3. Applying manual, mathematical or electronic methods
2.4. Use exact trading rules especially for entry and exits
2.5. Back trade moving forward from the oldest information
2.6. Take commission, slippage, and interest into account.
2.7. Record keeping of results
2.8. Use multiple currencies and different time spans
2.9. Start with a high-level review

3. Paper Trading (Using a demo account to simulate live trading)

3.1. Ensure that the periods traded covers all 3 types of markets:- trending, trading and sideways
3.2. Use candles where possible
3.3. Using exact rules for entry and exits
3.4. Simulate live trading as far as possible
3.5. Record keeping of results
3.6. Use Multiple currencies and cross currencies

4. Post Mortems (Analysing the results of traded transactions)

4.1. Do a post mortem on every deal when paper and live trading and ask questions regarding:-
4.1.1. Entry execution
4.1.2. Exit execution
4.1.3. Lessons learnt
4.1.4. Stop appropriate
4.1.5. Limit appropriate
4.1.6. Where did the price go after exit
4.1.7. Hard copy filed
4.1.8. Review the daily, weekly and monthly charts asking the following questions
1.4.3.1. What opportunities were missed if trendlines were used
1.4.3.2 What opportunities were missed if moving averages were used
1.4.3.3 What opportunities were missed if momentum indicators were used
1.4.3.4. What opportunities were missed if channel trading or wave trading were used
1.4.3.5. What opportunities were missed if breakout techniques were used.
1.4.3.6 Why were these opportunities missed and what changes should be made to the trading strategy.

5. Final Word

Remember that paper trading or back trading can never truly simulate live trading because of the emotional aspect of trading. Your results will always be better in testing.