In order to trade Forex successfully, you need a Forex trading system. Find out what a Forex trading system is and how to do Forex backtesting to see if this Forex system is the best option for you.

2. Just looking at the statistics on the number of successful forex traders, it
is easy to know that Forex trading is not easy. The rewards are huge if
you you are successful, but the risks are just as huge. One way that can
help you get a great understanding of forex and help you be a successful
trader is to learn how to use forex backtesting to evaluate a forex
trading system.

3. Before we get into the nuts and bolts of forex backtesting, it is a good
idea to look at some of the basic definitions of a forex system and
backtesting.

4. A forex system is a set of rules that tell you when to buy or sell a currency. This
could be based on a set of signals from technical analysis, charting tools, or
news based events. A system can be either manual or automated. A manual
system involves a traders analysis, looking for signals to decide when to buy or
sell. While on an automated system, the trader can use software to look for
certain signals and to interpret these signals.

5. There is really no right or wrong way here, it is more of a preference. However,
many prefer an automated system as it leaves out the emotions that can lead
many traders to take bad decisions.

6. With a forex system, there are some strategies that the system will use to
give trading signals. Forex backtesting is a way to test these strategies
and find out how well the system performed in the past.

7. This is done by using historical data, and to find out how that strategy
would have worked if it had been used at that time. Backtesting doesn't
imply how a strategy would perform now or under future conditions.
The markets do change over time and many factors can make the
hypothetical performance and the actual performance differ
significantly.

8. So, while forex backtesting does not guarantee a profitable strategy, it is
a huge step in the right direction. This is why many successful traders
are always backtesting their trading strategies.

9. There are two methods to use when doing forex backtesting. There is
an automated backtesting where the trader can set the rules and
criteria of the strategy, and the software will automatically track the
historical data and give a picture of how that strategy would have
performed at that time.

10. The other method is manual. This would be done by going back in
time on the chart and manually employ the trading strategies and see if
they would have worked in a real-time environment. The biggest
disadvantage of the manual method is there is a lot of work involved.
This makes it difficult to be sure that the backtesting is objective in the
manual method.

11. There are two considerations that a trader must be aware of when doing
forex backtesting. Both of these considerations will help you get better
results in your forex backtesting. The first one is choosing the right
time frame. This is basically receiving enough trades to make the data
statistically valid. For example, if an account conducts 3 trades per
month, then it best to backtest several years to get enough data.

12. The second consideration is similar as the bigger the sample data the
better the result. If you get a big sample data, the smaller the margin of
error and establish more reliable data. An example of this is to combine
3 years of backtesting with 6 months of a forward test to develop a new
trading strategy.

13. Now you know to use forex backtesting to test your system and strategies
in trading and build a solid trading strategy. This can save you a lot of
time and money from using a trading strategy that is unrealistic or
unprofitable.