As is always the case, one would always like to test any system for efficiency and effectiveness. This also goes for Forex trading. In such a scenario where one couldn’t afford to lose, it is always important to test and check the system that one is using.
The method of testing now is quite advanced. With the aid of some software, a treader can test his system by looking back into the historical data of a certain system and identify the parameters in the strategy that are important. This is the backtracking method. After implementing the identified parameters in the result, these are incorporated on the historical data and results are checked again. In other words, this is just a sort of a simulation of the results.
If the traders find out that the simulated parameters and conditions of the system would have good results, then the traders will adopt the system for actual use in real trading. The simulation phase therefore plays an important role in testing the system. After all, this simulation is based on data from the past, or as we say these are historical data. How the system responds therefore to the given parameters and conditions would identify the reliability of the system.
According to some Forex traders who have had experiences in stocks and shares, the general guideline for testing a forex trading system is test it first on stocks and shares. If the system is returning profits consistently, then it is very likely that it would also function well as a Forex trading system. On the other hand, if the Forex trading system does not perform well on stocks and shares, then it must be that the system is not tough enough to withstand the volatility inherent in Forex trading.
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