5 Questions You Need To Have Answered Before You Back-Test
Your Forex System
As 90-95% of new forex traders lose money within the first 3-6
months this article helps to guide new forex traders by asking 5
questions that the forex trader needs to know prior to
back-testing their forex system.
Let us jump right in...
1. What data type are you using (or going to use)?
I know this sounds strange, especially if you have experience
from another market such as stocks as their generally is only one
type of data source available. However, in the forex market you
can have up to 4 different data types: bid, ask, mid and
indicative. Each have their own little nuances.
If you would like to know more about the data types then visit
the article written about the perils of indicative
prices. As this will save me from having to repeat the
information again and boring those who've already read it.
So, if you know you have indicative prices then you know
you're in for some good results! However, if you have any of the
other three you need to be careful on how stop and limit orders
As an example: If we had bid price history and we were looking
to place a buy entry stop at 0830 EST according to the day's
high, then we know that the bid price will not accurately reflect
what the actual price of our order should be. You would have
noticed that if you placed a buy entry stop at the exact same
price as that of the day's high you would have entered
prematurely - you would have entered 4 or 5 pips before the high
or the low of the day was touched (the exact same amount as the
spread your broker offers!).
This leads me into the next most important question...
2. What spread is your broker offering on the currencies you
You need to know this as this can help you set your slippage
settings on each currency.
As our example in question 1 pointed out. We found that our
buy at the day's high method did not exactly work because we
bought at the BID PRICE high, not the ASK PRICE high - the price
that we need when we place our order TO BUY.
Therefore, we enter in a slippage setting representing the
spread that would be exhibited by this trade on this
But knowing at what price to buy is only half the problem...
how do we know what quantity to buy?
3. What margin does your broker offer?
If we know at what price to buy our currency at we need to
inform our broker on what quantity to buy to fulfill the order.
We only know what quantity to buy by the margin that the
brokerage firm offers.
Most brokerage firms offer 100:1 leverage, however, some firms
offer mini accounts with 200:1 leverage, others only 50:1
Find out the margin required.
4. What restrictions does your broker impose?
Now, I don't just mean margin and spread restrictions as I
have mentioned above. These are important in their own right,
what you need to find out are the details.
This is probably the most important question of all as the
fine line between success and failure can be found in the
details. Now you can have this questioned by one of two ways: 1.
You can find out through experience (generally the most expensive
way unless done through the demo account!); or 2. You ask your
broker (the cheapest and best way).
Why is this so important? I hear you ask. Well let's say you
have a system that trades any gaps that might form on Sunday at
1700 EST, but your broker does not open until 1730 EST. You
either need to factor this restriction in to your system, or move
onto another system completely. Or, you may have a system that
has 10 pip stops, but you find out that your broker will only let
you place 15 pip stops from your initial entry price. Once again
you will need to change your system to see whether it still
performs well, or throw out your system (or change your
In fact one of the most devastating restrictions imposed by
FXCM is that they do not accept stop entry orders if price never
happens to trade at your entry stop price! FXCM will honor and
"take the loss" of your OPEN stop positions, but if the liquidity
is not there and price has shot straight through your stop price
then you will miss out. This can have disastrous effects on your
system results as you are left wondering on trades where you made
good returns - "Would FXCM have got me in?". You may want to
some of the quirks I use when placing entry stop orders on FXCM
that could be of huge benefit to you to help you possibly
get around this problem.
The restrictions by your broker are only half your systems'
success, you also need to find out about another more important
restriction... yourself. This leads me to the final point...
5. What restrictions do you have?
This is a vitally important question. Most people test their
systems and fall in love with the results but find when they
trade their system they have lost their account and that most of
the best signals occurred while they were sound asleep!
As the forex market is a 24 hour market, you need to put into
place restrictions in your system that will be realisticly
conducted by you during the course of a normal trading day. There
is no use operating a trailing stop method that changes your stop
points during times when you are asleep and cannot possibly do
I hope this article has made you aware of some of the
important things that need to be known prior to testing your
Article written by Ryan Sheehy from Currency Secrets.com. Where
you will find reviews on forex data vendors, signal providers,
brokers, and popular forex resources, along with more quality
articles... all for f*ree!
MORE RESOURCES updated Sun. August / 20 / 2017
View from London: Euro/Yen Among Currency Trading PuzzlesMoneyshow.com (registration)The break of 110 in USD/JPY leaves the 130 break looking more interesting in the cross and suggests 127.50 is the next big level to watch – an indicator of the path chose by investors, writes Bob Savage, CEO of Track Research in Wednesday commentary ...and more »
The psychological aspect of trading is usually
underestimated by those new to trading. The psychological
problem for most traders is the fear of losing - ironically
it is this fear that causes most traders to lose money in
the long run.
The Basics of
Foreign exchange market is also known as Forex or FX
market. To date, it is the world's biggest "economic
5 Questions You Need To
Have Answered Before You Back-Test Your Forex
As 90-95% of new forex traders lose money within the first
3-6 months this article helps to guide new forex traders by
asking 5 questions that the forex trader needs to know
prior to back-testing their forex system.Let us jump right
Chinas New Currency
The base unit for the renminbi is the yuan, which is how
the Chinese currency is most commonly referred to. The
official ISO abbreviation for the yuan is CNY, but it is
also commonly abbreviated in the forex industry as RMB.
Adaptation to the
Realities of the Market
Do you think adaptation to the realities of the market is
the most important thing?Many times in the past I've
written about the need to adapt, the need to be able to
change your behavior relative to the market because the
markets are ever changing. I've stated that mechanical
systems may be workable, but for only a short time relative
to the life of markets.
Reality of Online Forex
Foreign exchange trading is the trading of currencies. Most
currencies can be traded.
Most traders tend to concentrate on pinpointing the perfect
entry for a trade. However, in reality the entry price is
just one part of the equation.
The Major Players in the
Foreign Currency Exchange Market - FOREX
Since the US dollar is the centerpiece of the market, it is
normally considered the 'base' currency for quotes. In the
"Majors", this includes USD/JPY, USD/CHF and USD/CAD.
What I Learnt Losing
£60,000 My First Year as a Full-time
During my first year as a local (independent trader) on the
floor of LIFFE, I bought and sold 8804 FTSE futures
contracts, about 40 contracts per day on average. The
result was a loss of £61,620 or -£267 per trading
I read on a bulletin board a traders comment that on his
first outing trading the E-Mini S&P 500 he lost on each
of his trades. He noted though, that had he had a wider
stop each of his trades would have been profitable and that
therefore he would be trading with a wider stop in future.
Risk and Stock Trading
Fees: The Two Barriers To Overcome If You Want A Successful
You know the old joke:" How do you make a million in the
stock market? Start with two million?" There is no way
around it, risk and stock market fees are a part of trading
that you can't avoid. But, you can manage your risk.
Choosing A Forex
With currency trading becoming ever more popular, the
number of brokers is growing at a rapid rate. What should
one look at when deciding which broker to open an account
with? These are the important points to consider.
Is The U.S. Dollar About
To Reverse Course?
For the first time in several years the U.S.
Forex Trading Online - 7
Reasons Why You Should!
Forex trading online is a fast way to use your investment
capital to it's fullest. The Forex markets offer distinct
advantages to the small and large traders alike, making
Forex currency trading in many ways preferable to other
markets such as stocks, options or traditional futures.
The Margin Advantages of
There is one aspect that is considered as one of the best
advantages of FOREX Trading. This is related to the amount
of money you need to place a trade, this is known as
"margin", and in short, this is all that can be lost in a
the case you had a bad trade.
Momentum Trading: A
Practical Day Trading Strategy to Get Profits from Hot
Momentum day trading can be extremely profitable when done
Forex Signal, Forex
There are lot's of Forex signals providers out there. New
Forex traders might be thinking of looking for a reliable
Forex signals provider.
Where is the Market
If you ask me whether the market will have moved up or down
by this time next year, well I may as well flip a coin,
because I don't know. If you ask me whether the market will
have moved up or down by this time next month, well again,
I may as well flip a coin, because I still don't know.
A Look at Forex Market
The investor in the currency market takes for granted that
a pair of currencies can be bought or sold at a moment's
notice. Once an order is placed with a broker, the trade is
executed within seconds.
New Opportunities with
The simplest definition of currency trading is the practice
of exchanging one country's currency for another country's
currency. Basically, currency trading involves four main
variables: currencies, exchange rate, time, and interest
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