{"id":58206,"date":"2014-08-18T07:27:48","date_gmt":"2014-08-18T11:27:48","guid":{"rendered":"http:\/\/countingpips.com\/?p=58206"},"modified":"2014-08-19T13:17:19","modified_gmt":"2014-08-19T17:17:19","slug":"back-testing-a-forex-strategy","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/back-testing-a-forex-strategy\/","title":{"rendered":"Back Testing a FOREX Strategy"},"content":{"rendered":"
August 18, 2014<\/div>
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Article by ForexTime<\/a><\/p>\n

Back testing a trading strategy is a methodology used in determining if the trading strategy generates profits over a specific period of time.\u00a0 The process evaluates the profitability of a trading strategy based on historical data.\u00a0 Many portfolio managers use back testing to prove a strategy they have created works, but fail to evaluate a number of issues that are inherent in evaluating historical returns.\u00a0 Back testing can be a way to develop a successful trading strategy but there are a number of pitfalls which include:\u00a0 fitting a curve, slippage, and commissions.<\/p>\n

Back Testing Considerations<\/b><\/p>\n

One of the key assumptions when evaluating a specific trading strategy is determining if the strategy will work in the future.\u00a0 A strategy that has too many criteria can work when evaluating historical data, but will fail to work when the trading environment changes.\u00a0 For example, a strategy that works when a market is consolidating might fail if the market begins to trend.\u00a0 Criteria that is fit to a specific period (known as fitting the curve), will likely have a difficult time producing robust results when forward tested on live data.<\/p>\n

Fitting the curve is a process of refining the criteria that is used to create a trading strategy and limiting the time horizon used to back test the strategy.\u00a0 For example, is an analyst only used 2 years of data on the S&P 500\u00a0 index to create a strategy and had 10 specific criteria to initiate a trade, it is likely that the strategy will be a good analysis of what occurred in the past, but not be a good predictor of future price action.\u00a0 The results of a highly refined back test which likely only produce a few results.\u00a0 The goal of a back test is to produce a robust number of results that are statistically significant and are likely to occur again in the future.<\/p>\n

Commissions<\/b><\/p>

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The costs of transacting and clearing stocks, futures, options and commodities are called commissions.\u00a0 Each broker has a different fee, based on a number of criteria including the volume of trading throughout the year, or the type of product that is traded.\u00a0 Commissions need to be considered; as they also have an effect on the total profit and loss generated by the back tested trading strategy.\u00a0 A trading strategy should subtract commissions from its results, as these are the costs of doing business that cannot be eliminated when evaluating a strategy.<\/p>\n

Summary<\/b><\/p>\n

Back testing is analysis that can help an investor determine if a trading strategy has worked in the past.\u00a0 It is very important for an investor to back test a security over multiple time frames to make sure that the strategy has worked during different trading environments.\u00a0 Once a strategy shows robust historical results, a trader should forward test the strategy in real time to determine if the strategy can work in the present<\/p>\n

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\"Forex-Time-Logo\"Article by ForexTime<\/a><\/span><\/strong><\/p>\n

ForexTime Ltd (FXTM)<\/strong> is an award winning international online forex broker regulated by CySEC 185\/12 www.forextime.com<\/a><\/p>\n

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Article by ForexTime Back testing a trading strategy is a methodology used in determining if the trading strategy generates profits over a specific period of time.\u00a0 The process evaluates the profitability of a trading strategy based on historical data.\u00a0 Many portfolio managers use back testing to prove a strategy they have created works, but fail […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-58206","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/58206","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=58206"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/58206\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=58206"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=58206"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=58206"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}