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 six months or whatever period you choose. This doesn’t take too long as you can rapidly scroll thru historical charts searching 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. Of course the market isn’t going to repeat in exactly the same way so you must take into account the indisputable fact that you might have struck lucky or unfortunate and picked a time when the system performed abnormally well or badly.

Because of this, it’s best to backtest over the longest possible time and perhaps split your tests so that instead of testing, for example, one full year when the market might have been particularly robust or feeble, take the first quarter of year one, the second quarter of year 2, etc so that you test one 3-month period from each year of four years. This gives you a good period spread without requiring you to cover 4 whole years.

The second way to test forex systems is in a demo account. Here you are working with the live market but not using real money. This method is slower because you have got to wait for your signals to come up for real . On the other hand, it simulates real live trading techniques with the possibility of slippage and other factors which are not gong to turn up in back testing.

Remember that you can test several systems at the same time in a demo account, provided you keep separate records of their performance. Or you may use several demo accounts. In this fashion you’ve a better likelihood of ending up with one rewarding system at the end of your period of testing.

Currency exchange 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. This gives you solid real time training to prepare you for the present when you go live with real cash. Most currency exchange brokers will supply free demo accounts which you may use to test foreign exchange systems.