Becoming consistently profitable in forex trading involves earning and holding points and then repeating the process.
Unfortunately, it is not as simple as it seems.
Making successful trades is not just about having a great setup. It requires a system that gives you an edge over the markets, solid risk management, and good control over your trading psychology.
Testing your trading strategies can help tell you whether you should make adjustments to the settings you make.
If you know for a fact that your system maintains its edge over the markets, you can more confidently direct your efforts to managing risk and developing trading psychology.
In short, back and forward testing scientifically eliminates bad trades from good trades.
It tells you which currency pairs, timeframes, indices and trading environment make the best points given your usual trading parameters and risk tolerance.
Testing systems also help you become more confident in executing your trades. This is why we recommend this activity for beginners and experienced traders who are considering live trading.
See, a lot of the anxiety that traders experience has to do with uncertainty. Common mistakes such as cutting profits, letting losers run, and not using stop-loss orders all stem from a fear of making a mistake.
But when you know and anticipate when your system is likely to be showered with pips or when you will lose, you will have better chances of sticking to the trading plan.
Let’s say Trader A knows his trading system is good at spotting trends. She analyzed numbers from previous years and learned not to panic when a scale environment results in small fake runs and losses for her system. She knows her system, despite its losses, could be profitable by the end of the year.
Before you start calling your programmer friends, you should know that there are limits to trading system testing. More specifically, the tests will not show you the effect of slippage and broker commissions.
If you are trading short timeframes or large volumes of trades in one day, these factors can change your overall profitability.
So, how do you start testing your strategies? Traders nowadays have the advantage of having a wide variety of software and platforms to choose from. Ask your broker for recommendations or ask Google for the best option you can find.
Remember that like any frequent (but necessary) activity in forex trading, testing systems gets easier with time and practice. Its positives still outweigh the negatives by a mile and will definitely help push you to become a consistently profitable trader.