How To Test Forex Trading Strategies?

 

Panorama. What is the best way to test a forex trading strategy? A quick survey of this topic shows that the main focus is on software testing. Software is very important, but it's only part of the picture. In contrast, little attention is paid to test method issues. However, it is essential to make an objective estimate of the quality of your trading strategy.

 

In the classical way, the purpose of testing is to manage risk and provide a numerical estimate of quality. This is done by assessing the likelihood of failure based on the results of carefully selected test scenarios that run within the timeframes available. By applying these classic principles to the testing of forex strategies, we aim to manage risk by defining appropriate testing strategies and developing test programs.

 

crisis management. The purpose of testing is to reduce the risk and consequences of a possible failure. The more tests you have, the lower the risk is usually. Basically, if you can test all possible inputs, this risk can almost be eliminated with a simple system. The situation is largely different for the foreign exchange market. The market is unpredictable, so no matter how many times you test it, the number of "untested items" is unlimited. Therefore, successful testing does not guarantee future performance.

 

Does this mean that testing a forex strategy is completely useless? Regardless of the correct answer, we believe this question is too theoretical.

 

Of course, the goal of reducing risk through testing should be maintained. However, you cannot request strategic testing to address business risk in all situations. Therefore, we need to confirm the definition of failure, and most importantly, the success criteria of the test. For example, if your trading strategy can function with a certain probability, you can measure success by determining certain conditions.

 

Testing strategies are another fundamental element of traditional Forex Tester 4. With the right strategy, you can balance the level of risk and the work required to realize it. The unpredictability of the forex market makes testing strategies even more important. As you remember, no test can provide 100% test coverage. On the other hand, testing multiple strategic parameters against large amounts of market data is already a complex and time-consuming task. Therefore, the testing strategy is responsible for choosing the required testing program so that it can reach a reliable quality level in a reasonable time.

 

To facilitate risk assessment, simplification is needed. One way is to assess the risk of the strategy regardless of the market risk. This is in line with the view that trading strategies are more likely to fail when market behavior changes (high market risk) rather than "stable" market conditions (low risk). The advantage of this method is that if market uncertainty is low, all known classical test methods can be used to obtain a quantifiable quality estimate.

 

Scene test. Classic test scenarios include the most common (positive) use cases and the most likely (negative) expected failures. Our approach is to use the market model as a scenario. The forex market is unpredictable, but its shape is clearly visible. Elliott Wave is one of the famous examples of market models. By analyzing the performance of trading strategies under real market conditions, we try to determine the best model as a test scenario.

 

For example, when market trends are positive. From a clear overall market direction, all trends are similar, so market risk is lower. Negative situations are situations where market risk is high, for example, when market conditions change or when business strategies are observed to continue to fail. The main quality criterion for negative scenarios is to identify them as quickly as possible and minimize losses.

 

In positive situations, the main purpose of testing is to optimize the parameters of your business strategy. In the case of the trend market example above, the scope of the test includes trend sets of different shapes and sizes for different time frames. Every trend is unique. For example, the kick is different