Why back-testing is important for Forex traders

Going in blind when playing poker is a highly risky move and not advised unless you really want that dangerous thrill. The same is true when trading forex, if you don’t exactly know what you’re doing but still plough ahead and start buying and selling currencies with no strategy, the chances of making any money are incredibly slim. For this reason, it’s always a good idea to back-test any strategy first, which is possible through most trading software.

Reduce Risk

The use of leverage when trading forex introduces great opportunities to maximise profits from a low starting capital, but it also does the same for potential losses. Controlling and reducing risk is therefore even more import and back-testing strategies is a great way to do this.

It can be a time-consuming process, taking between one and two hours to back-test one strategy but is preferable to losing a lot of money quickly with an untested strategy. If you back-test a strategy that shows great losses would have been made this can prevent you making that real mistake with your own investments. Not doing so could result in some disastrous consequences.

Find New Opportunities

You may be surprised when back-testing a strategy to find that not only is it more successful than anticipated but it could open up more new opportunities. These can then be developed into separate strategies or simply apply the same one to a different currency pair.

As the forex market is the largest and most liquid in the world, this introduces a lot more risk and opportunities than other markets. Back-testing does use historical data, showing where stop losses and limit orders would apply, so any results may change slightly for present and future markets. Still, it provides a better indication than not back-testing.

Develop Market-Beating Strategies

In a similar way to finding new opportunities, back-testing allows you to try out a range of strategies to discover the optimal one for trading currency pairs. It may be done through trial and error but there is no limit to how much you can back-test, meaning you can try as much as you like before trading on the live markets.

Much like anything; practice makes perfect. The more you do the greater the chance of forming a market-beating strategy that can help you really take on other traders and the market. Improve your chances of success by using trading software or platforms with back-testing capabilities to take on the forex market.