BACK TESTING YOUR TRADING PLAN
So you have your trading plan, you know what your looking for and your feeling positive about trading. How do you really know that this trading plan works? The answer is, at this point, you don’t.
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So you need to put what you've learnt into practice. We come up with new strategies and unique ways to trade all the time but we wouldn't jump straight into trading a live account following theses new strategies. We need to practice. Practice on a demo account and find out how many trades out of 50 worked out in your favour.
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If your satisfied with your results, then do the same on a real trading account.
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Back-testing your ideas on a demo trading account gives you the chance try out new or old ideas risk free on a live market. Many people jump straight into a live account and end up losing a lot of money so don't fall into that category.
You need to work out what type of trader you are. In order to do that you need to practice,
adjust and improve your trading plan.
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You may be the type of trader who likes to concentrate on the 4 hour timeframe and nothing lower, someone who takes a more conservative approach to trading.
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Or you could be the type of trader who likes to get in fast concentrating on the 30 minute timeframe and possibly even lower, which is an aggressive style of trading.
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Depending on your personality and what type of trader you would like to be, you will have to adjust your trading plan to suit.
For example, if you are a more conservative trader, you won’t need to monitor the charts as much because little retracements or pullbacks won’t worry you in the slightest.
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But if you have a really aggressive style and concentrate on the smaller timeframes then you will definitely need to monitor your charts more because pullbacks and retracements on these timeframes could end up costing you a lot of money.
Back testing, where to start?
We start the back-testing process on our charting software. You can use tradingview to test ideas or use the charting software which your brokerage will offer.
Break down the chart starting on the monthly timeframe, find the monthly range and follow the guidelines in the “Chart Time: Setup and Execute” lesson. This is where you can look for points on the chart where you would of likely entered the market and see how your idea works out.
In this example below we have broken down the chart, applying all the technical analysis needed.
This is where you can start to see areas which made for great entries either long or short.
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I have highlighted on this example where we could of potentially bought or sold the rejection of the trendline. (blue circles)
Practice makes perfect.
The more time you can spend breaking down charts making predictions on where price is headed next and reviewing your predictions after, the better trader you will become.
The more you practice, the quicker you will be at spotting opportunities. So go back in time on the the charting software and practice analysing and implementing your trading plan.
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This is the time to fine tune your game plan. Which confluences do you want to see before entering a trade? How many confluences can you see in the examples you've found in the past? This is all about improving your understanding of the Forex market and developing your abilities as a successful proactive trader. Finally record the results of the practice trades you've found and review your results in order to find what works best for you.
It’s really important to understand that if the same situation/trade setup occurs in the live market which you've seen a number of times when back testing that the outcome can still be different; we know that the market is ever changing and every single moment in the market is unique.
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So use your time looking at historical data and charts to perfect the art of technical analysis but don’t assume that history will repeat itself because this will lead to mistakes and losses.