One critical step on your Forex journey is going to be backtesting. Once you find a system or method which you like, you are going to need to run through historical data and see how your method would have performed on real trades over the past few weeks, months or years (depending on the timeframe you’re planning to trade). It is recommended you do at least a couple hundred of backtest trades for any given system to establish a really good idea of how the Forex system will perform in those market conditions. Market conditions do change, so a backtest still doesn’t give you all the information you need, but it can sure give you a good lead in to your demo testing. If you record a lot of important information you can also learn specific things that work and don’t work and how you can refine your system to statistically improve your profits.
On a Forex backtest spreadsheet you will want about six columns. The first will state whether each trade was a buy or a sell. The second column should list the date, and the third column the reason for the trade. The fourth and fifth columns should be the entry and exit prices respectively. The last column will be the sum of pips you gained or lost from each trade. The column where you list the reason you entered the trade can be a good place to take specific notes along with the triggers which caused you to enter. Those notes will come in handy later, so be detailed, especially on trades you lose. Later you can look back and find patterns which will help you to refine and eliminate losses.
Write your Forex trading rules at the top of your spreadsheet. They will help you focus and also remind you of what your rules were on this backtest when you look back on it later. If you make changes as you go to your system, note those changes and the historical dates on which you implemented them.
Some statistics to calculate from your data, which will be useful to you, include net pips from your entire Forex backtest, along with the values of your average win and average loss. You’ll want to tally how many wins and losses you have, and what your win percentage and win to loss ratio is. Remember that the spread will cost you some profit on every trade, and breakeven trades are technically at a very small loss as a result. You can calculate an adjusted net which takes these losses into account. Take note of your biggest losing streak, and how many losses in a row you endured. Also find out your average net winning trades per month, week, day, or whatever is an appropriate unit of time for you to overview your trading. Another good quotient to add up is your net profit divided by your maximum loss. This will tell you how many of your largest losses you could endure before blowing all your profits.
Forex backtesting can be pretty overwhelming at first, but eventually you’ll get used to it and get into a rhythm. And it can be incredibly rewarding—it can make the difference between whether you blow your account in real life or become a profitable trader.