How to Test Foreign Exchange Systems

First you can use backtesting. Here you take your system and figure out on paper how well it might have done on the recent historical market, i.e. The last half a year or whatever period you choose. This does not take too much time because you can rapidly scroll through historical charts looking for the signals that would have led you to make a trade if you had been operating your system live at that time.

Backtesting should give you an idea of whether a system has potential.

For that reason, it is best to backtest over the longest possible time and perhaps split your tests so that instead of testing, as an example, one entire year when the market might have been especially strong or weak, take the first quarter of year one, quarter two of year two, etc so you test one 3-month period from each year of four years.

The second way to check forex systems is in a demo account. Here you are dealing with the live market but not using real money. Remember that you can test many systems at the same time in a demo account, provided you keep separate records of their performance. Or you can use many demo accounts. In this way you’ve got a better possibility of ending up with at least one profitable system at the end of your period of testing. Forex demo accounts also have got the edge that you are developing your live trading skills and familiarity with a software platform and charting service at the same time as you are running your tests. Most currency exchange brokers will supply free demo accounts which you can use to check currency exchange systems.

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