Education

Guide to backtesting: what every trader should be doing

By Paul Reid

28 February 2024

3207 backtesting

When uncertainty is rampant and markets fluctuate wildly, smart traders leverage every tool and strategy at their disposal. Backtesting is a powerful and advantageous activity that is often overlooked by traders, despite claims that it can effectively guide the user by harnessing historical data in a more active way.

Is backtesting right for you? What are the benefits? Let’s find out.

What is the benefit of backtesting for traders?

Backtesting trading strategies may be one of the cornerstones of developing a robust trading plan, one that too many traders skip. It involves the application of historical data to test the viability of a trading strategy. A simulation of a strategy's performance without risking actual capital. 

Let’s say you are thinking about testing chart pattern analysis, or perhaps learning to balance leveraging and Take Profit/Stop Loss with an established price range and market volatility.

Backtesting lets you experience months of experimentation in a short time. In just a few days you can establish your budget and risk management levels, and also improve your instincts for eyeballing the charts on the way.

5 tips for better backtesting

The Exness Terminal offers all you’ll need with a simple and user-friendly approach to backtesting. The Bar Play feature alone can save you valuable time and money, and it is highly recommended for traders of all assets. Check out these 5 tips so you get the most out of your backtesting efforts.

1 . Clearly define the rules of your trading strategy, including entry and exit criteria, trade size, and any other relevant parameters.

2 . The time or data period you select should be comprehensive, covering various market conditions to ensure a thorough backtest.

3 . For simplicity, lay lines (left vertical toolbar) over the charts in the directions you forecast then watch the market unfold at a rapid pace. Hours pass by in seconds and the results of your analysis are revealed instantly.

4 . Evaluate the outcomes of the backtest critically. Look for patterns of success and failure, and assess the strategy's performance across different market conditions. Take notes in your trading journal.

5 . Based on the backtesting results, make necessary adjustments to your strategy. This might involve tweaking your entry and exit criteria, adjusting risk management rules, or exploring different markets.

Backtesting on the Exness Terminal

Let’s delve into "how to perform backtesting on Exness Terminal," specifically utilizing the Bar Play feature:

1 . On the Exness Terminal, click the Bar Play icon (two backward pointing triangles).

2 . Scroll until the time period over which you wish to start backtesting your strategy is in view on the chart then click the chart to set the starting point.

3 . Press play (forward triangle), and the Bar Play feature will simulate market movements for that period… at a fascinating and almost hypnotic high speed.

Always keep in mind that past performance does not guarantee future results. Back testing indicates coming price actions. It does not confirm them.

Conclusion

Backtesting is more than a theoretical exercise; it's a practical tool that prepares traders for the realities of the market. By understanding why backtesting matters and applying the principles outlined above, traders can enhance their strategies, minimize risks, and approach the markets with greater confidence.

While backtesting is an invaluable tool in a trader's arsenal, it's important to recognize the limitations of backtesting in trading. Historical success does not guarantee future results, as market conditions are always changing.

While the benefits of backtesting are clear, its true value lies in its execution. Traders are encouraged to use tools like the Exness Terminal to get a wider perspective. Seeing the relationship between risk, reward, and time, all playing out at high speed will unlock a wider vision that will help you better manage your account, order sizes, leverage settings, and Take Profit/Stop Loss levels. And the best part is that all the knowledge and experience is available free and fast.

Get yourself on the Exness Terminal today and use the Bar Play feature to see what you’ve not been considering.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.