subject: Finding A Profitable Forex System - Why Back-testing Is So Important [print this page] The major goal for any forex trader is to find a trading system that is capable of generating profits on a consistent basis. This sounds relatively easy, particularly as there are thousands of these systems being sold online and many more being freely available on some of the trading forums, but that isn't the case at all.
The fact is that it can be a long time-consuming process. You cannot just take a look at a particular trading method, apply the indicators that are used to your price chart, and check if it's profitable or not. You have to do a lot of very thorough back-testing to see how it has performed in the past, as this will tell you if it is likely to be profitable in the coming months and years.
Of course just because a system has done well in the previous months does not necessarily mean it will continue generating profits in the future. However it's the best guide you are going to get.
As regards the actual back-testing itself, you basically have two options. You can either do it manually or use some kind of charting software or computer program to help you.
If you use some software, you will know within a matter of minutes if a system is profitable or not, and the great thing is that you can go back months, and even years, to check on it's profitability. So this is a very speedy process, but it's not that easy to do because it does often require a little bit of technical expertise.
If you do it manually you will have to look at the price charts and write down the result of every single trade that took place using the entry and exit rules of the system that you are testing. This sounds like an arduous task, and indeed it is because you should not only note down the profit (and loss) per trade, but also the amount of winning and losing trades so you can get an idea of the maximum drawdown of the trading strategy.
So the message I want to get across is that the only way to properly test out a trading strategy is to do some thorough back-testing. The longer the back-test the better as this will give you an idea of how well it performs in different market conditions. The overall profit figure is of course important, but you should also pay attention to the maximum drawdown as well because you don't want to use a system that sometimes has long losing runs. In the long run you want to find a system that gives you steady gains with minimum drawdown.
