Becoming consistently profitable in forex trading involves making pips, keeping them, and then repeating the process.
Unfortunately, it’s not as simple as it sounds.
Making successful trades is not just about having a fantastic setup. It requires a system that gives you an edge over the markets, solid risk management, and a good grip of your trading psychology.
Testing your trading strategies can help tell you if you should make adjustments to the setups that you’re taking.
If you know for a fact that your system is maintaining its edge over the markets, then you can more confidently direct your efforts to your risk management and trading psychology development.
In a nutshell, back and forward testing scientifically weeds out the bad trades from the good trades.
It tells you which currency pairs, time frames, indicators, and trading environment yield the best pips given your usual trading parameters and risk tolerance.
Just ask Robopip, who regularly tests the SMA Crossover Pullback System and Inside Bar Momentum Strategy on major currency pairs.
Testing systems also helps you become more confident in executing your trades. This is why we recommend the activity to newbies and demo traders who are thinking of trading live.
See, much of the anxiety that traders have has to do with uncertainty. Common mistakes such as cutting profits, letting losers run, and not using stop losses stem from the fear of being wrong.
But when you know and expect when your system is likely to make pips rain or when it’s going to miss, then you’ll have better chances of sticking to the trading plan.
Huck, for example, knows that her HLHB Trend-Catcher System is good at catching trends. She has crunched the numbers from the previous years and has learned not to panic when a ranging environment produces small fakeouts and losses for her system. She knows that, despite its losses, her system could be profitable by the end of the year.
Before you start calling up your programmer friends, though, you should know that there are limits to testing a trading system. More specifically, tests won’t show you the impact of slippage and broker commissions.
If you’re trading short time frames or large volumes of trades in a day, then these factors could change your overall profitability.
So, how do you start testing your strategies? Traders nowadays have the advantage of having a variety of programs and platforms to choose from. Ask your broker for recommendations or Google the best option you can find.
Remember that like any repetitive (but necessary) activity in forex trading, testing systems gets easier with time and practice. Its pros still outweigh the cons by a mile and would definitely help nudge you into becoming a consistently profitable trader.