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5 Questions You Need To Have Answered Before You Back-Test Your Forex SystemAs 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 are placed. 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 are bask-testing? 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 currency. 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 leverage. 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 broker)! 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 read of 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 so. I hope this article has made you aware of some of the important things that need to be known prior to testing your system. 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 Sat. May / 21 / 2022Best books to learn Forex Trading from scratch Free Press Journal Weakened Euro May Become Equal to the U.S. Dollar The New York Times How to Know Which Currency Pair to Trade Startup.info Hong Kong Spends $722 Million to Defend Currency Peg The Wall Street Journal CEO Of Cryptocurrency And Forex Trading Platform Charged With Fraudulent Scheme Involving Over $59 Million Department of Justice Even the Foreign-Exchange Market Is Getting Kind of Crazy The Wall Street Journal BC: Tips for Success in Forex Trading Punch Newspapers Currency trading in overdrive with dollar at highest level in two decades (NYSEARCA:UUP) Seeking Alpha All Those Celebrities Pushing Crypto Are Not So Vocal Now The New York Times Value of Pakistani Rupee touches fresh low at PKR 200 against US Dollar The New Indian Express Why forex trading is not gambling Nairametrics Canada shares higher at close of trade; S&P/TSX Composite up 0.08% Investing.com India Two firms get online forex trade licence Business Daily Titan Capital Markets Releases Key Analysis of AI Market Outlook And Trends For 2022 - GlobeNewswire GBP/EUR: Pair Holds Steady Below €1.18 Currency Live Allied Copper Comments on Recent Promotional and Trading Activities at Request of OTC Markets GlobeNewswire Basics of Forex Trading - Part 1 FX Empire Best Forex Trading Platforms: Most Famous Forex Brokers & Traders of 2021 Washington City Paper Investor's Guide To Forex Trading Seeking Alpha Moscow Limits Foreign-Currency Trading to Shore Up Struggling Ruble The Wall Street Journal ‘War has killed orders’: Chinese producers lament loss of Russian business South China Morning Post FX trading: A loser's game? ETF Stream What is forex trading? Evening Standard Gold forex trading explained City Index Trading Forex vs Futures: Key Differences IG International How to Trade Forex TD Ameritrade The Most Common Warning Signs of a Forex Scam Finance Monthly Forex Trading TD Ameritrade Currency Trading Basics & How It Works Investopedia Is forex trading a way to make a living? Nairametrics FOREX.com Review | The Ascent The Motley Fool Turks Abandon the Lira for Dollars as Currency Crisis Deepens The Wall Street Journal Forex Trading Hours: Limitless Trading in an Endless Market The Coin Republic Changing the Top Global Currency Means Changing the Patterns of Global Trade Carnegie Endowment for International Peace Basics of Price Gaps in Foreign Currency Exchange Market The Southern Maryland Chronicle What Is Forex Trading? Guide to Foreign Exchanges Investopedia Is forex trading halal or haram? The Armchair Trader Falling Dollar Shows Resurgence of Infamous Carry Trade The Wall Street Journal Bank of England stumbles over FX trading gold mine Financial Times Global currency market seen as the premiere way to trade central banks' pandemic-era policy divergence MarketWatch Currency Exchange Near Me: Find Locations Nearby GOBankingRates A Surprising Reason Why Currency Exchange Rates Fluctuate Kellogg Insight Volume of foreign exchange trading helps predict returns on currency trading, says study Cambridge Network 6 Questions About Currency Trading Investopedia Ukraine crisis hits global FX, but reaction not always as expected Euromoney magazine Short Selling Currency: How to Short Forex CMC Markets Local currency trading with Sri Lanka not feasible, says govt official Business Standard Central bank sync puts foreign exchange market to sleep Financial Times 10 frequently asked questions about Forex trading in India Augusta Free Press
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