Are Your Forex Backtesting Results Misleading?If you have experienced backtesting results that are profitable, yet a disaster when trading live then this is for you.
Most likely you have backtested your forex strategies at some point. Those that have, more common than not, discovered great backtesting results only to find that they did not come close to live trading results. Why?
• Historical data quality is poor. Step one, if you backtest is to obtain quality forex tick data.
• Historical data is not from your broker.
• Spreads are not realistic with the real market as they are simulated in historical data and weekend spreads can skew results significantly.
• Limitations with backtesting software, whereas, assumptions and workarounds are implemented.
• Intrabar order execution is a best fit model, more like a best guess of where the real trade would have been triggered.
• Strategies traded and/or tested below a 1-hour compression will always be misleading.
• Rate precision i.e. number of significant figures is not taken into consideration by the backtesting platform.
• Relying on data to far back in history. History rarely repeats itself in the market for short term traders. If you are in it for years, then possibly.
Determining the Accuracy of Backtesting
First, check to see if your backtesting results are matching with live results. This is easily accomplished by recording your live testing for a few days, better yet a week. Then backtest against the same data with the same settings. Compare the two and you will know.
What’s the Solution?
In our experience we have yet to find a software solution that has been sufficiently accurate when it comes to backtesting against historical forex data – and we have tried many. There is an exception, if your strategy does not use Intrabar criteria. Meaning orders and analysis are always conducted at the close or open of bar/candlestick and on 1 hour bars or higher and always use quality fx tick data.
To some this can appear to be cumbersome. Is it worth it, if it provides accurate results? You bet! We are not suggesting that you live test for years or even months. However, if your backtesting accuracy test failed you have virtually no viable alternative.
The FxOdds software, along with its simplicity in strategic money management without complex indicators and charts, contains a live recording feature. Set your strategy, click the record button. Stop the strategy recording feature when you desire and view the results.