One of the most frustrating things for aspiring traders is that when you have free time, the market is closed.
This long weekend is a perfect example – you’ve got Friday and Monday off, which would be ideal for you to try out that new intraday strategy you’ve been itching to unleash on the market. Of course, the markets are largely closed on those days so you can’t.
The itch to trade doesn’t end there. Even when you have time available the market often chooses not to give you setups. So you take sub-par trades – and pay the price.
How do you scratch that itch to trade, and at the same time avoid reckless behaviour that just ends up costing you in the long run…and gain market experience when the market is closed? For me, the answer is simple: Backtest.
In fact, for every hour I spend trading live, I’ve spent 10 hours backtesting.
What does backtesting look like? Back in May last year, I uploaded a very short video of myself backtesting a strategy I call “The Ricochet”. Have a quick look:
I go through about 10 trades in two minutes.
Using specialised software like the one I use in the video, I can backtest years worth of data in a few hours, thoroughly putting any theories to the test, risking no money whatsoever and at my convenience. For those interested, the software I use is called ForexTester 2, and its actually available at a 25% discount right now (the special ends today). If you do decide to get it, let me know – I have a short course available on how to use it for maximum advantage.
You don’t need Forex Tester to backtest though. Open up your MT4, pick a chart and hit “F12” on your keyboard. MT4 will advance your chart by one candle at a time. ‘Paper’ trade as you go.
What does backtesting give you? Confidence and data. You develop confidence in your strategy and your data tells you things like:
Relative and absolute drawdown
Winning streak length and probability
Losing streak length and probability
Mean Favourable Excursion (Google it)
Mean Adverse Excursion
Backtesting is one of the major keys to success in trading. So, if you were hoping to develop your trading skills over the weekend and planned on trading with brokers that are online (usually offering massive spreads), maybe rethink that and spend a few hours honing your abilities offline.
Glenn Howell | PracticalPips