FOREX Software: Test Your Strategy !!

FOREX Tester is a brilliant piece of software that not only makes the critical process of testing easier, but more enjoyable, too. You have access to tons of historical data for several currency pairs, which allows you to perform a meaningful and statistically significant test of your system.

It has a complete charting package with various indicators and drawing tools (support and resistance, trend lines, etc...) as well.

In a nutshell, you can manually backtest your system by indicating directly on the historical charts where your trades would have taken place, while the software automatically keeps track of all the necessary statistics described in the previous post

Furthermore, you can tell the software what your money management rules are - basically, what you want to risk per trade. It will then account for that in your profit/loss statement statistics.

FOREX Tester is a truly innovative product that can do wonders for any trader's performance and confidence. Do yourself a favor and check out all the free instructional videos on the site.

You can also give a demo version a try for free. Although the demo version is somewhat limited compared to the purchased version, between that and the tutorials you should have a pretty good idea if it's what you're looking for.

Now, let's fast forward in time a bit and assume you've got a system you've tested. When you view your results, obviously the first thing you will turn to is the total profit. I urge you not to look at your profit in isolation from other important factors such as:

1. Drawdown. This is probably the most important figure and represents how deeply your account equity loses value from a previous equity peak. For example, if you start with $5000 and suffer a few losing trades that brings your account down to $4500, then you have endured a 10% drawdown. You can have a great system that yields insane profits, but how would you feel if on the way to those profits you had to go through a 60% drawdown? I personally cannot endure more than a 20% drawdown, so no matter how profitable a system is, i would never trade it knowing that the potential for this kind of drawdown existed. Reflect on this carefully BEFORE you trade!

2. Largest winner. If the largest winning trade in your testing is responsible for most of your total profit then steer clear. If, for example, you have net profit of $5000 but $4800 of that profit came from a single trade, then the system cannot be considered reliable.

3. Average winners and losers. The software will take all winning and losing trades and calculate their respective averages. The goal is to ensure your average winner is greater than your average loser. This is an important figure in establishing your reward:risk ratio over a series of trades, which is what really counts. As i mentioned in earlier posts, you might have a winning trade only 40% of the time but if, on average, your winners are worth $200 and your losers $75, then your reward:risk is 2.6:1, a very good ratio that would ensure you are still making money over the series of trades.

4. Expectancy. This is what you should be focusing on! It is basically a mathematical calculation that takes into account the accuracy of your system and its reward:risk ratio (also known as an R-multiple) and comes up with a figure. That figure is then multiplied by the number of trade opportunities the system made available. This figure, known as expectancy, allows you to establish how good your system is compared to others in terms of profit per dollar risked.

If we elaborate on the above example, which assumed you have a system that wins 40% of the time and loses the remaining 60% of the time. It also assumes the value of your average win to loss was $200:$75 or 2.6:1. Let's also assume there were 100 trades taken over the test period.

The formula is simply this:

Expectancy = (% winners x r-multiple) - (% losers x r-multiple)
(0.40 x 2.6) - (0.60 x 1)
1.04 - 0.60 = 0.44
0.44 x 100 trades = $44 expectancy per dollar risked

Use this formula when deciding which systems to trade and you will have a discernable advantage over the countless other traders who focus solely on the accuracy of a system. Always trade in favor of expectancy and NOT accuracy

Please do check out Van Tharp's excellent and practical explanations on this essential topic

Until next time, i hope you enjoy the many benefits FOREX Tester brings you
------------------------------------------------------------------------
FINAL WORD OF ADVICE: Keep your system simple! As complex as this world of trading may seem to be, the irony of it all is that success stems from simplicity. Don't litter your charts with countless indicators to try and explain and capture every market movement. If you use them at all, keep it to 2 indicators at most or you run the risk of having a curve-fitted system that perfectly accounts for history but is worthless going forward (more on indicator combinations in future posts)
------------------------------------------------------------------------