Forex Systems - Test Before You Commit Real Money

Anybody who has been around the forex market for more than a couple of minutes knows that you always need to test forex systems before you go live with them. Even if the system comes with guarantees, even if you got it from a top trader who makes millions with it, you have to know that it will work for you.

So why do systems work for some people and not others? Many people actually find this quite hard to believe. They imagine there is one perfect system out there that fits everybody and could make us all into millionaires if only we knew how to get a hold of it. But that idea is a complete fantasy.

There are many reasons why a system might suit some people and not others. It could involve some skill such as interpreting a complex mix of indicators that some people will handle with no trouble while others cannot get their heads around it no matter how hard they try. It could be to do with risk: the system could involve going to a level of risk which would be way outside some people's comfort zones, leading them to either subvert the system or make mistakes because of the level of stress.

So you do need to test and you can do this in more than one way. The best option is to perform at least two types of testing which you can do at the same time.

First you can use backtesting. Here you take your system and figure out on paper how well it would have done on the recent historical market, i.e. the last six months or whatever period you choose. This does not take too long because you can quickly scroll through historical charts looking for the signals that would have led you to make a trade if you had been operating your system live at that time.

Backtesting should give you an idea of whether a system has potential. Of course the market is not going to repeat in exactly the same way so you do need to take into account the fact that you might have struck lucky or unlucky and picked a time when the system performed unusually well or badly.

For this reason, it is best to backtest over the longest possible time and perhaps split your tests so that instead of testing, for example, one whole year when the market might have been particularly strong or weak, take the first quarter of year 1, the second quarter of year 2, etc so that you test one 3-month period from each year of four years. This gives you a good period spread without requiring you to cover four whole years.

The second way to test forex systems is in a demo account. Here you are dealing with the live market but not using real money. This method is slower because you have to wait for your signals to come up for real. On the other hand, it emulates real live trading methods with the possibility of slippage and other factors which are not gong to show up in back testing.

Remember that you can test several systems at the same time in a demo account, provided you keep separate records of their performance. Or you can use several demo accounts. In this way you have a better chance of ending up with at least one profitable system at the end of your period of testing.

Forex demo accounts also have the advantage that you are developing your live trading skills and familiarity with a software platform and charting service at the same time as you are running your tests. This gives you solid real time training to prepare you for the moment when you go live with real money. Most forex brokers will provide free demo accounts which you can use to test forex systems.