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Why you should test your trading strategy
Written by: PaxForex analytics dept - Tuesday, 22 September 2015 0 comments
Successful forex traders don’t become successful by accident. They follow a tested and proven set of rules which help them trade effectively. Building a trading strategy that you’re comfortable executing is no easy feat. However, once you’ve found the right mixture of indictors and risk management that you’re comfortable with it comes time to test. Only with the test of your strategy will you know if the newfound strategy is worth repeating.
Forex is not something you learn once and become a master of. The financial world changes constantly and with it does the rules of forex trading. Forex trading involves consistent upkeep of knowledge. Once you learn something, you have to test it, and then retest it. It's a lot like being a scientist where new findings can affect your potential for profits. If you're someone who likes to learn, and likes to test out theories and strategies, you have a desirable trading trait.
It’s been said, wisely, that no one cares as much about the outcome of your trading as you do. Because you alone have to live with the results, you should focus on properly testing any
strategy that you’re looking to employ. This will ensure that you only trade strategies that have passed your due diligence as opposed to something that sounded good when you first heard it
There are two methods that you can choose to test your strategy. You can choose either a demo environment with no real money at risk, or a live environment with a sample amount of trading capital. Of course, you can exercise both options by first testing your strategy on a demo and then moving a relatively small live account. By limiting your trade size in a testing period, you’re allowing yourself to focus on the validity of the system and not on your profit/loss.
Is your trading strategy consistent or not you will find out after the testing period, which should be long enough (at least one year) and with high number of trades. Total number of trades will show you the validity of a system’s results. A test with a higher number of trades will give more weight because it shows how the strategy performed over many signals. Once you have completed your strategy testing and you are satisfied from its performance than you can slowly start increasing your trade’s size.