In this episode, Walter leans on the topic about the downsides of using backtesting and some of the common mistakes of using this method. He also gives some useful insider tips when backtesting to get the best and accurate data possible.

But, does having this number of computer screens actually contribute a tremendous amount to the success of your trades? Or should the focus be more on your trading psychology and execution?

Download (Duration: 08:16 / 9.46 MB)

In This Episode:

00:41 – limited range

01:32 – limited slice

03:10 – two big mistakes

05:20 – ten years of data

07:34 – snapback system

Tweetables:

Never assume that your system is going to work in all markets. [Click To Tweet].

Test on different types of markets and see what happens.  [Click To Tweet].

Get the breadth of different types of market under your belt. [Click To Tweet].

Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.

Hugh: Hi, Walter. A lot of educators talk about the benefits of backtesting but what are the downsides?

Walter: Wow, what a great question! One of the things I would say about backtesting is if you are not really careful, you can make a couple of mistakes. The first mistake would be that you would backtest a very limited range.

Let’s say for example, you backtested the EUR on the daily chart between say 2002-2004 or something like that or even 2002-2003, what you might come away with is a system that works really, really good in a trending market but does not work so well in a choppy sideways, swing up, swing down market.

That is one thing that I would guard against. The other thing would be, in other words, what you would want to do is you want to make sure that you test in different types of markets.

You want to make sure that you know based on your backtesting “Okay, if there’s a trending market, my system is not going to do so well” or, “If there is a sideways market, wow, my system is going to do really well” or whatever. You have to know that.

If you only take a limited slice of historical charts to use in your backtesting to verify your system and to build your confidence, then you are going to be in trouble later on when the market does not give you exactly what you backtested.

The other mistake would be to assume that your system that you backtested is going to work in all markets. The real point here is if I am backtesting the CAD/JPY and if I’ve got a lot of dials and switches and things that I can fine tune and indicators are famous for this.

Let’s say, I am doing a CAD/JPY system and I adjust the MACD, I adjust the moving average and maybe I’ve got like a Stochastic or Momentum or something and I just fine tuned all those that fits my systems really, really well, I cannot assume then that is going to work if I go ahead and trade the GBP or the EUR/JPY something like that.