The Simple Way to Test Foreign Exchange Systems
Guest article by Zone 99 Forex Review
First you can use backtesting. The last six months or whatever period you choose. This does not take too long because you can swiftly scroll through historical charts searching for the signals that would have led you to make a trade if you had been operating your system live at that point. Backtesting should give you an idea of whether a system has potential. Of course the market is not going to repeat in the same way so you do need to take into account the indisputable fact that you might have struck lucky or unlucky and picked a time when the system performed unusually well or badly.
Because of this, it is best to backtest over the longest possible time and maybe split your tests so that rather than testing, as an example, one entire year when the market could have been particularly strong or weak, take the 1st quarter of year one, the second quarter of year two, etc so you test one 3-month period from annually of 4 years. This gives you a good period spread without requiring you to cover four full years. Here you are working with the live market but not using real money.
Remember that you can test many systems at the same time in a demo account, provided you keep separate records of their performance. Or you may use several demo accounts. Foreign exchange demo accounts also have the edge that you are developing your live trading talents and familiarity with a software platform and charting service at the same time as you are running your tests. This gives you solid real time coaching to prepare you for the present when you go live with real cash. Most forex brokers will supply free demo accounts which you may use to check currency exchange systems.