In my 23 years of trading experience and 15 years of running this website, I've found that backtesting is the absolute best way to figure out if a Forex trading strategy works or not.
But many traders think that they need to know programming before they can backtest.
That's simply not true, anyone can backtest a trading strategy.
There are 7 steps to backtest a Forex trading strategy without coding:
- Choose a trading strategy to test
- Create a complete trading plan
- Select a charting platform
- Set a backtesting schedule
- Review your initial results
- Test other currency pairs
- Analyze the complete results to find potential issues
Keep reading to get all of the details and my recommended methods for each step…
1. Choose a Trading Strategy to Test
This is the easiest and hardest step.
There are a ton of trading strategies available on the internet, so there's no shortage of available strategies.
Some are free, some are in paid courses.
But it can be tough to figure out which ones have a good chance of working and which ones will probably fail.
Based on my experience, this is how I would recommend starting with picking a strategy to test.
First, find a timeframe that's going to fit your lifestyle.
This is super important.
For example, if you are asleep during the London Open, don't trade a strategy that relies on that time period to enter trades.
That may sound obvious, but many traders get caught up in the performance of a strategy and disregard if they will be able to realistically trade it or not.
Next, for your first test, I would suggest picking a strategy that trades on the daily chart.
You'll be able to finish a complete backtest on the daily chart quickly.
If it's successful, you can have a strategy that you can start to forward test and maybe even trade live.
Testing a strategy on a lower timeframe will probably take a lot of time and you might get discouraged.
Finally, pick a strategy that's easy to understand and seems like it might work, at least in concept.
Overly complex strategies rarely work and it's much easier to make a mistake when trading and testing a complex strategy.
You don't know for sure if it works, but that's why you're going to backtest.
Don't overthink it.
Trust your gut, learn from your results, and keep moving forward.
If you're looking for backtested Forex trading strategies, you can get some of my results here.
I also publish backtesting results in my newsletter.
2. Create a Complete Trading Plan
Many “trading plans” that you find on the internet are not complete trading plans.
They usually give you an entry method and maybe an exit method, but nothing else.
A REAL trading plan has the following:
- Strategy name
- Primary timeframe
- % risk per trade
- Where to place the stop loss
- Where to place the take profit
- Indicators used, with settings
- Entry rules
- Trade/risk management
Of course, not all trading plans will have all of these elements.
For example, some trading strategies don't set a take profit.
So in that case, you simply wouldn't fill out that line.
The same thing goes for any of the other information lines on the trading plan.
To be sure that you have a complete trading plan, download my free trading plan worksheet.
3. Select a Charting Platform
There are 2 types of charting platforms that you can choose from.
I'll give you the pros and cons of each.
Charting Only Software
There are platforms that only provide charting, but no backtesting functionality.
So they don't have a way for you to keep track of the performance your backtesting trades.
Therefore, you'll have to use a spreadsheet to keep track of your trades.
My favorite options in this category are:
There are others out there however, so take a look around and see what you like best.
These charting platforms are usually free and come with free data.
Since they are free platforms, many people have already created popular indicators for these platforms.
Tracking your backtesting trades on a spreadsheet is time consuming and tedious.
It's also not very precise because there can be data entry errors and you may not take into account slippage and the spread.
Some free platforms also don't have enough historical data to do a proper backtest on certain trading strategies.
I commonly find that free backtesting software generally has historical data starting anywhere from 2010 to 2018. In comparison, paid software can have data that starts in the 1990s.
But if you want to go with a charting only platform, you can download my easy-to-use backtesting worksheet here.
Charting and Backtesting Software
If you have some money to invest in your trading career, then I would highly recommend getting software specifically built for Forex backtesting.
It will save you a ton of time, and time is the only commodity that you cannot get back.
My favorite software is NakedMarkets.
At the time of this writing, it's the only Forex backtesting software that allows you to test fully manual, partially automated and fully automated tradings strategies, without knowing how to code.
It also has a complete analytics suite, so you can get detailed statistics on your backtests.
To see a comparison of all of the manual backtesting software options (at the time), read this post.
Just FYI, NakedMarkets is not in there because that video/post was created before NakedMarkets was available.
Again, the biggest benefit will be the time you save over recording your trades in a spreadsheet.
Backtesting software can also factor in the spread and give you instant statistics on your testing.
If you use a spreadsheet, you'll have to create those metrics yourself and some of them can be difficult to calculate.
The only real downside is that you'll have to spend a bit of money on these software solutions.
It can also cost some money to get historical data.
Download Historical Data
Before you start a backtest, make sure that you have downloaded as much historical data as possible.
In the Forex market, it's good have data from at least 2001.
With older currencies like the British Pound, you can get data that goes back into the 1970s.
It's generally not necessary to go back that far because electronic trading was not a big thing yet and the results of a trading strategy will be much different.
If you can only get data from a couple of years back, then switch charting/backtesting platforms.
That won't be enough data to do a real test, even with a day trading strategy.
You can also get data from third party providers. Just be sure to check with them to see that you can upload their data to the software that you want to use.
4. Set a Backtesting Schedule
Let's face it, backtesting isn't always fun.
In fact, it can be downright tedious sometimes.
But it needs to be done, so make a schedule to backtest and make the process as fun as possible.
The easiest way to start is to put it on your calendar.
Use whatever calendar tool works best for you.
Then figure out ways to make the process as easy and fun as possible.
For me, I enjoy backtesting more when I can at least partially automate the process and see the results from a complete test within a week or so.
If it drags on longer than that, then I can get bored.
Also consider playing some non-distracting music while you backtest, to liven things up.
5. Review Your Initial Results
Once you don't have any more historical data to test with, it's time to review your results.
Pay particular attention to the following:
- Maximum drawdown
- Win %
- Win multiple (average winner / average loser)
- Maximum losing trades in a row
- Ratio of winning months/years to losing months/years
When you first start backtesting, you probably won't know what a good trading strategy looks like.
I'm not trying to insult your intelligence, that's just the way that it works.
It's an experience thing.
Everyone has a preconcieved notion of what a good trading strategy looks like. Sometimes that's realistic and sometimes it's not.
On top of that, a good trading strategy for one person might be a terrible trading strategy for another.
Some people don't mind big drawdowns if they can get large returns. Other prefer low drawdowns and steady returns.
It's just a matter of preference.
Therefore, only experience can give you a relative feel for what you would consider a good strategy and what you wouldn't want to trade.
A very helpful way to figure this out is to look at the return graph and monthly/yearly results for the strategy.
Ask yourself if you could deal with the losing months/years.
If yes, then that's a strategy that you should continue working on.
If no, then either tweak the strategy a little, or move on to the next strategy.
6. Test Other Currency Pairs
Once you complete a backtest in one currency pair, it's a good idea to find out if that strategy will work with other pairs.
So do the exact same test on other pairs and see if you get similar results.
As a general rule, a strategy that works will with the major pairs won't work that well with the crosses.
…and vice versa.
Therefore, if your strategy did well with a major pair, start testing other major pairs.
The same thing for crosses.
This is not always the case, but it's a good rule of thumb to save yourself some time.
If your strategy works well on multiple pairs, then combine the trades from all of the tests and see how the strategy would have performed across the portfolio.
You might find that the portfolio takes too many correlated trades, which leads to large drawdowns.
So even if the results were good for each individual pair, the portfolio might have terrible performance.
In that case, you might consider only trading it live on the most profitable pair, or consider trading different versions of the strategy on different pairs to introduce diversification across your portfolio.
7. Look for Potential Issues
It's exciting to find a trading strategy that's profitable in backtesting, but your job isn't over yet.
You'll have to review the results of your test and figure out if there are any reasons that your strategy might not work in live market conditions.
Also look for potential errors that you may have made in the backtesting process.
A common mistake is that traders don't factor in the spread and/or the slippage in their backtest.
You might be able to get away with that for a strategy that trades on the daily chart or higher.
But the lower the timeframe, the more the spread and slippage will negatively impact the profitability of the strategy.
Here are some other things to look for:
- Did you over optimize (curve fit) the strategy?
- Did you use enough historical data?
- Do a lot of trades open while you're sleeping or at work?
- Are you making any assumptions about the strategy or the markets without actually testing your assumption?
- Do your results have a fairly steady return or are your results based on a few big winners?
- Does the strategy have a larger drawdown than you would be comfortable with in live trading?
- Is there potential correlation between related currency pairs?
Those aren't all of the things that could go wrong, but they will get you started.
Take some time to think of other things you could have missed.
The point here is not to discourage yourself, but to take an objective view of your results.
If everything looks good and you feel like you've covered your bases, then congratulations!
Now it's time to do some forward testing.
Frequently Asked Questions
Is backtesting accurate?
Most people who ask this question are really asking if backtesting will guarantee profits in live market conditions.
There is no guarantee that a trading strategy that's profitable in backtesting will be profitable in a live account.
There are a few reasons why a strategy might not work in a live account:
- You didn't backtest over a long enough historical period
- You over optimized your backtest, so it doesn't work going forward
- You didn't factor in the spread and slippage when backtesting
- The strategy had a couple of huge winning periods, but didn't do well the rest of the time
- You miss too many trades in live trading
- Market conditions have changed dramatically
- You get emotional during live trading and don't follow the rules
However, if your trading strategy was backtested over a long enough time period and it worked in different market conditions, your probability of success with that strategy is much, much higher.
Another way to gain confidence that backtesting works, is to read about the success of traders who backtested.
My favorite story is of Ed Seykota.
How long does it take to backtest a Forex trading strategy?
The length of time that it takes to do a complete backtest on a trading strategy will depend on:
- The complexity of the strategy
- The software you use to backtest
- The timeframe that the strategy trades on
- The amount of time that you have to backtest every week
There are obviously a lot of variables involved here, so it's impossible to tell you how long a backtest will take.
However, I can give you some times from my personal experience.
I've been able to backtest a simple strategy on the daily chart, in about 4 hours.
On the 4-hour chart, a complete test usually takes a few days.
A test on any lower timeframe can take a couple of months to complete.
Those are just my average times and I don't test every day.
But that will give you an idea of how much time you might need to do a full test on one currency pair.
What is the minimum number of trades needed to prove that a trading strategy works?
Contrary to popular belief, there isn't a minimum number of trades that will “prove” that a trading strategy has an edge.
Just like with a lot of things on the internet, bloggers and YouTubers want to boil things down to one simple “hack” that will give you the answer immediately.
A common number that gets thrown around is 100 trades.
In reality, there's really no set minimum number of trades.
Your goal is to get enough backtesting trades so that you're confident enough in the trading strategy that you're willing to risk real money trading it.
This video will give you more details and show you exactly why the idea of a minimum of 100 backtesting trades is a total myth.
Do professional traders backtest?
But don't take my word for it.
Listen to my podcast interviews to learn the role that backtesting played in the success of these professional traders.
If you don't want to listen to all of them, these are the interviews where we talk about backtesting the most.
Not all professional traders backtest.
But if you're looking for a repeatable process for testing and optimizing a trading strategy, then I haven't seen a more reliable and faster method than backtesting.
Can you backtest news trading strategies in Forex?
Even though news trading is a form of fundamental analysis, you can actually backtest a news trading strategy.
All you need is a historical file with news data. At a minimum, the file should have the following information:
- Expected outcome
- Actual outcome
- Importance of the news
My favorite tool for backtesting news strategies in Forex is NakedMarkets.
It has a filter that allows you to only see the news that applies to the pair you're backtesting.
There can be dozens of news items a day and you need a filter because otherwise there will be way too much noise.
Another great feature is you can also search for specific keywords in the news items.
However, the most important filter is the impact filter. It's generally best to select the only the high impact news items because those are most likely to move the markets.
So that's how you backtest a Forex trading strategy, without knowing how to code.
There are many benefits to backtesting a trading strategy, and I would consider it essential to becoming a consistently profitable Forex trader.
However, there are limitations to backtesting. Be sure that you aren't over optimizing your strategies and keep them simple.
The best trading strategies are usually super simple.
Above all else, make the process fun and get curious about how strategies will turn out and how to make them better.
When you make it a process of discovery, instead of something that you have to do, then you're much more likely to do it on a regular basis.
Remember, you're more powerful than you know…keep expanding!