Tuesday, 13 April 2010

Forex Backtesting

Forex Backtesting - Beware Of Backtesting!

What is backtesting?

Backtesting is essentially the testing of a trading technique employing historical market prices, to see how top notch that system can be. This testing is usually done providing computer program that runs the trading system within a range of time in the past.

Why should you beware of backtesting?

Many new traders think that good backtesting results will guarantee similar results in the future. This is a big mistake because a system that has worked in the past may not necessarily work in the future. This is because the Forex market is always changing and evolving. The Forex market today can be very different from the market last year. The past does not equal the future... if it did, we'd all be millionaires by now!
What about trading systems with good backtesting results?

Because everyone knows what has happened in the past, it's easy for anyone to create a trading system that can be very profitable during that time (in the past). But remember: we're not trading in the past; we're trading in expectation of the future. Trading systems with good backtesting results may very well fail miserably in the future.

But this fact has not stopped unscrupulous people from selling Forex trading systems based on "excellent" backtesting results. They use impressive hypothetical (i.e. backtested) results as a sales tool. Unfortunately, many traders purchase these systems only to have them fail miserably and causing them to lose thousands of dollars.

What can I do to protect myself?

When looking for a good trading system, ask the system developer whether the results are actual or hypothetical. Many people assume that hypothetical returns are actual returns, but that's just not the case.

Forex Backtesting

Now that you know it's easy to create a system based on backtesting (i.e. hypothetical) results, you'll hopefully be more skeptical about trading systems with little or no actual trading results.

Article Source: http://www.articlesbase.com/ - Forex Backtesting - Beware Of Backtesting!

1 comment:

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