Do you backtest strategies?
Whenever I find myself sitting in front of the computer but the market is not moving much, I often will start looking backward in time on the charts and backtesting my strategies. Its easy to scroll back on the charts and see where moving averages crossed, or other indicators showed buy or sell signals in the past. But I quickly found a problem with backtesting this way: depending on the time frame you use, you can get several signals during one candle, or fake signals, during real time trading that you may not see when you are backtesting. So I could see that backtesting the signals were a much higher percentage of winning trades than I ever get in real time. So the best way to truly test a strategy before trading real money is to forward test. This method is technically just testing the strategy using real time charts and trading it with a demo account. Then, keep track of all your decisions, signals, reasons for trade entry and trade exit for a set period of time, say 3 months. At the end of the test period, tally up the winners vs losing trades and number of pips accumulated. Then ask the question: is this a winning strategy or not? Traders do not like to forward test because it is much more time consuming than back testing, but the results are so much more accurate! Good testing and good trading.
EURUSD: Since my last blog entry EURUSD has dramatically bounced off the 38% fibonacci retracement line and is moving back up, back in the direction of the overall trend. I am only BUYING this pair on any dips. 1.4626 is the 50% retracement of the last retracement down, so it will be interesting to see how high price goes. It may want to retest the high near 1.5000…soon.