Backtesting is a process in which a trader assesses the performance of a trading strategy over historical data. However there is more to just punching a few numbers into a simulation program or blindly hovering over the charts. Following these essentials will make a tremendous difference in backtesting results.There are key elements to backtesting. Which if ignored could result in total disaster.
News
Before a trader starts backtesting one should look through an economical calendar and outline Interest rate decisions,press conferences and NFP report dates. As these news releases have a major impact on currency pairs most strategies lose their edge during those times. And not considering trade setups around high impact news releases has a major significance on backtesting results.
Trading Sessions
The time of day a trader executes a trade is crucial. Apart from London and U.S. trading sessions most entries are likely to be fakeouts. As trading volume and volatility gets low, bizarre whipsaws are very likely. Limiting Backtests to these two major trading sessions will filter fakeouts out and produce quality results.
Weekdays
While keeping Backtests limited to major trading sessions. Traders need to keep in mind that Monday’s trading sessions can be really slow and price follow ups are not always as anticipated. In addition, the second half of Friday’s trading session experiences similar lagging follow ups.
Recap
Backtesting around major news releases and within two major trading sessions. Moreover being cautious with the first and last day of the Week. Will produce accurate and high quality test results.
I hope you enjoyed this article. Feel free to ask me any questions or share your opinion in the comment box below. You can contact me also at miadkasravi@zfxtrading.com and please like this post if you found it useful.
‘Best,
Miad
ZFX 