How to Backtest PROPERLY

Summary

In the video "How to Backtest Properly" by The Moving Average, the host, Artie, shares effective techniques for backtesting forex trading strategies, highlighting common mistakes traders make. The focus is on testing strategies according to specific trade windows and market sessions to align with actual trading habits. Artie explores the benefits of using tools like TradingView’s replay feature for real-world simulation, emphasizing the importance of patience, and rule-based strategies to avoid traps in the market.

Highlights

• Most traders backtest at any time, but it’s crucial to backtest during your specific trading window. 🕒
• Utilize TradingView’s replay feature to simulate trading without future knowledge – it's like a crystal ball with frosted glass. 🔮
• Setting vertical lines during your trading hours helps maintain focus and limits overtrading. 📉
• Finding consistency in trading involves respecting your own rules and strategy, even if it means no trades for a while. 🔄
• Before going live, forward testing on a demo account ensures your strategy remains strong under different conditions. 🛡️

Key Takeaways

• Don't just backtest randomly; test during the times you actually trade for realistic results! ⏰
• Use TradingView's replay mode to simulate live trading conditions – know how it feels to fly blind! 👀
• Always set clear and consistent rules when backtesting; it's your roadmap to success! 🗺️
• Beware the trap of forced trades; patience pays! Waiting is often a strategy in itself. 🦥
• Make 100 backtests your goal to truly assess strategy effectiveness – data is your friend! 📊

Overview

Have you been testing your trading strategy at all the wrong times? Artie from The Moving Average is here to set you right! In a game-changing video, he demystifies the process of backtesting, focusing on the significance of aligning your tests with your actual trading hours. This minimizes risks and maximizes the relevance of your results, setting a strong foundation for future trades.

The video emphasizes how to practice without predicting. With tools like TradingView's replay feature, traders can simulate real trading conditions by 'removing' their foresight of upcoming market moves. This approach demands traders react to market conditions as they appear, training them on patience and decision-making.

Artie also leaves us with a critical lesson on discipline: If it doesn’t meet your checklist, don’t trade! A systematic approach to backtesting and trading can prevent costly mistakes. By putting practices to the test on a demo account first, traders build confidence and refine their strategies before staking real money.

Chapters

• 00:00 - 01:30: Introduction and Common Mistakes in Backtesting The chapter introduces the importance of backtesting in forex and day trading. It highlights a common mistake that many traders make, which is backtesting incorrectly. The host, Artie, intends to demonstrate the correct way to backtest trading strategies, implying that proper backtesting is essential to verify the effectiveness of any trading strategy.
• 01:30 - 03:30: Setting Up Proper Backtesting The chapter focuses on setting up proper backtesting for day trading, emphasizing the common mistakes traders make. It highlights the importance of not just starting backtesting from the current date but understanding the intricacies of the trading strategies used. The discussion is set against the backdrop of analyzing the Euro/USD currency pair, and the speaker is prepared with high energy, illustrated by having two high-octane coffees. The goal is to ensure profitable day trading on a consistent basis.
• 03:30 - 05:30: Using Vertical Lines for Trading Windows This chapter discusses the use of vertical lines as a tool for trading windows, specifically in the context of moving average crossovers. The speaker elaborates on the repetitive process of back testing each instance where two moving averages (such as the 21 and 200) cross over. However, a challenge mentioned is that many times, the back testing efforts do not yield successful outcomes because they fail to account for the timing factor in these crossovers. The chapter emphasizes the importance of not just back testing for patterns but also considering the timing to gauge the effectiveness of trading strategies.
• 05:30 - 09:30: Importance of Market Structure and Replay Option The chapter discusses the common mistakes traders make when backtesting, particularly the issue of backtesting at times when they wouldn't typically be trading, such as unusual hours like 3 a.m. It emphasizes the importance of being aware of market structure and the replay option to avoid such pitfalls.
• 09:30 - 14:00: Identifying Traps and Setting Up Smart Trades The chapter focuses on teaching traders how to identify potential pitfalls (traps) in the market and how to strategically set up intelligent trades. It emphasizes the importance of selecting the correct timeframe for backtesting a trading strategy, which should align with the timeframe in which one is actively trading. For example, a professional day trader who starts their day at 6 a.m. and begins trading with the market opening in London should concentrate on that specific timeframe rather than others like the New York or Asian sessions, which may not align with their trading schedule or objectives.
• 14:00 - 19:30: Analyzing Market Structure and Trade Management The chapter discusses backtesting strategies for trading, focusing on setting up a clear visual framework. The author suggests using vertical lines to mark the trading sessions, specifically recommending trading during the London session from its opening until lunchtime to avoid periods of market consolidation.
• 19:30 - 24:00: Scalping Strategy and Handling No Trade Days This chapter focuses on the importance of setting boundaries in trading, especially with scalping strategies. It emphasizes not spending too much time trading per day and underlines the significance of having profit goals and stop losses to prevent over-trading and unnecessary losses. The key takeaway is to have clear targets for both profits and losses and to stop trading once those targets are met.
• 24:00 - 30:00: Trading Examples and Conclusion The chapter emphasizes the importance of back testing in trading, urging traders to simulate their trading strategy over an extensive number of instances (100 times) to ensure its reliability over time. By analyzing a sufficient amount of data, traders can establish a comprehensive win-loss ratio, which is crucial for evaluating the effectiveness of their trading strategies.

How to Backtest PROPERLY Transcription

• 00:00 - 00:30 so you finally found the golden strategy that you think is gonna unlock your millionaire potential in forex and day trading now it's time to back test that strategy because every professional trader knows that back testing is crucial when it comes to checking if your strategy works well i'm here to tell you that you've probably been back testing the wrong way so in this video i'm going to show you how to back test the right way [Music] welcome back to the channel everybody my name is artie and this
• 00:30 - 01:00 is the moving average a show where we discuss everything day trading to keep you profitable on a consistent basis okay so we're going to be doing some back testing today i've got both my coffees that are high octane and i'm going to show you what you've probably been doing wrong in your back testing strategies so let's jump into the charts and take a look at euro usd okay so when it comes to back testing most people just start back testing from today and every single time they get an indication of their trade
• 01:00 - 01:30 they just do it so say for example you're doing a moving average crossover so you take your 21 and your 200 and you're literally just looking for every single time the moving average crosses over and so you test this one you test this one you test this one you test this one and the main issue with this is like every single time you're testing it like you know this one didn't work because it happened it consolidated and then it reversed like you're doing all of this back testing and you're not even looking at what time
• 01:30 - 02:00 it is on the charts say for example this one you know you see start down trending you see the crossover you're back testing and you're getting in on this trade you're not even paying attention that for you this is 3 a.m there's no way you're going to be up at 3 a.m so why are you even back testing on that time that's the number one mistake i see all of these back testing channels do they just back test every single time this occurrence happened and the issue with that is that during
• 02:00 - 02:30 london session the indication may be different than new york session an asian session is mostly consolidation so there's no point in back testing your strategy at that time you should only be back testing your strategy at the time that you actually trade so if you're a professional day trader and you wake up you know 6 a.m and you're on the charts at 7 a.m and you're trading by market open in london that is the one time frame that you should be looking at
• 02:30 - 03:00 when back testing so in order to do this like to have a clear visual representation so you don't have to worry about it what i want you to do is actually set up vertical lines at the time that you're going to be doing your trading so for me it is the london session now i don't like to trade all day so i only do from when london opens till about lunchtime when the market starts to just kind of consolidate for a second so what i want you to do is take two vertical lines and set it up
• 03:00 - 03:30 from the point where you start looking at the charts to the point where you're done for the day you don't want to be trading for eight hours a day nobody does that somebody's gonna get like two successful trades and call it quits for the day there's no reason that you should over trade every single day you should have your profit goals like i wanna make you know two percent today or four percent today and so when you hit your number you're done for the day if you hit your stop loss like i'm only willing to lose one percent per day when you hit that close the charts and walk away so
• 03:30 - 04:00 what i want you to do because back testing is extremely important and you need to know that this works over time so for every single trading day that you do you want to set up two vertical lines in the time range that you're actually on the charts trading and i want you to do that 100 times the reason you want to do 100 times is because that's going to give you a nice pool to choose from like when you're back testing a hundred times and you lose you know 15 to 22 times you're gonna have an absolute win loss
• 04:00 - 04:30 rate for your strategy if you back test it five times and then go you know full cowboy on it odds are it's gonna be a lower percentage than you anticipated because you only back tested it three times another crucial part about back testing especially on trading view is to not do it on a chart that's already there you want to have the replay option available to you the replay option completely erases all of the candles from the time you drop that line
• 04:30 - 05:00 forward so you can actually click the play button and watch the price develop as if you were trading it in real time this way you don't know what's coming up and you actually have to trade it as if you don't know where the price is going to go a lot of people see these charts and they're like see i would have won here but you already know that it's going up like if you were watching this and saw these fat rejections live you'd think it was actually going to reverse and bounce off of that and it didn't so what i want you to do is sign up for
• 05:00 - 05:30 a trading view account you can actually get the premium package where you get the replay option for like free for 30 days so try that and you're going to do all of your back testing in those free 30 days and if you feel like that's a useful tool to you you can actually continue paying it because when you first sign up to trading view it's free but then once your free trial period is coming to a close you actually get a 60 discount off of the normal price which
• 05:30 - 06:00 is a slamming deal because the holy premium package on here is like 850 and you could end up getting it for i think 245 so that's what i did you should too all right so to get the replay option you just click the replay button right here and you get this big red line and you can drop it anywhere you want and it's going to remove all of the candlesticks to the right so i've dropped this right here right on the left hand side you're gonna see this like speed meter and it's gonna give you one update every
• 06:00 - 06:30 two seconds it you can adjust the speed at which the candles populate and then once you're ready you can click the play button right here or if you want to do like step shifts forward you can just like keep clicking this button right here you hear the clicking just find a nice comfortable speed to where it's faster than normal time but it's slow enough to actually get you to make a decision so when analyzing when back testing you want to see what the price has been doing on the time frame that you're
• 06:30 - 07:00 trading from here you can see we've been on a big uptrend and now we're starting to break market structure what do i mean by breaking market structure we had you know higher highs and higher lows consistently all the way up and now we're consolidating and drooping down trading below the moving averages this is a break in market structure so what should you be doing when you're seeing a break in market structure you should be looking for the opposite positions the price is probably going to start trending down so i've got it set up at one update
• 07:00 - 07:30 every one second so this is how the price is looking right now you can see that the price is coming up to my trading window i'm only going to actually start placing trades once i cross over this line because this is when i'm actually on the charts trading but you're doing your analysis prior to making sure that you know which direction you're going to be trading so now that we're trading below the 21 day moving average i'm only pretty much looking for short
• 07:30 - 08:00 positions we're coming below the 21 we're coming up to test it right here we're ejecting it we've broken through these are the things that you want to look out for you know say it's 7 a.m i just opened up the charts i'm starting to see it trading below the 21 day moving average we're kind of breaking out a little bit but still trending below it so let's pause it here let's really analyze what's going on i'm on a five-minute chart we're trading below the 21 getting closer to the 200 moving average in my mind i'm only
• 08:00 - 08:30 looking for short positions here now depending on what your strategy is maybe you're a moving average crossover person or maybe you're scalping between moving average like you've seen in my scalping video right here so that's what i'm going to be doing i'm going to be using my strategy only on this time frame during this back test on every single bracket that i've made the last 100 brackets i'm not going to be doing 100 brackets so it's currently 7 20 a.m on this chart i know the market opens at 9 00 a.m i'm
• 08:30 - 09:00 usually doing my analysis for about an hour kind of just like seeing all of the pairs that i trade and like looking at where the direction is going i write those all down on a little piece of paper and i'm like only look for shorts on euro usd so let's slow it down just a little bit so that we can do this nice and easy we're seeing the price develop 9 a.m is gonna be right about here so at this point i'm gonna start looking for my positions i don't like to trade the exact market
• 09:00 - 09:30 open because there's a lot of fluctuation when the market opens even at eight am we start getting these long wicks so right now 8 am has shown me some bullish momentum up above now i'm always looking out for traps when it comes to looking for traps you want to see these like big spikes in one direction and wait do not trade those big spikes in one direction that is the worst thing that you can do you're literally setting yourself up for failure wait until you see the opposite candle whether their spikes down or spikes up
• 09:30 - 10:00 you wait for the opposite candle if that opposite candle is engulfing that's a trap and you should go in the opposite direction just like that 8 a.m happened we had these weird wicks it started spiking up trading above the 21 day moving average we bounced off of the 200 and this is what caught people this bounce right here even though we've been consolidating and trading below the 21 showing a slight downtrend this bounce off the 200 moving average
• 10:00 - 10:30 got people excited and they think that this is a rejection of a support level and it's going to continue up and what did it do it started going up like crazy and we had these big long green wicks and then if you were a patient trader like i've taught you to be patient you wait for the trap to be set and you go with the person setting the trap you don't fall for the trap you're not a rookie so we get this big fat bearish engulfing i'm looking for shorts at this point this is even before market open
• 10:30 - 11:00 but i'm getting in on a short position right here i'm keeping my stop loss quite large at this point because there's a lot of volatility in the market in the morning and i'm not willing to get stopped out so you can be looking at this point for 20 pips 30 pips but throughout the day i'm pretty sure you can get 50 pips out of this massive volatility so let's keep our stop loss here nice and comfortable above we can adjust it once the price starts going in our direction it's just the beginning of it that you want to prevent a stop out so
• 11:00 - 11:30 we let this play out trade is going in our direction that's nice so at this point the trade has been going in your direction for quite a nice amount of time at one point you were up about 30 pips so depending on how much money you actually want to make like you have to have a strategy of i want 20 pips per trade or looking for a to one risk to reward ratio but you also have to keep in mind
• 11:30 - 12:00 that once market structure is broken that's when you want to get out of a trade you want to only look for the moves you don't want to be in a trade when it's consolidating so i'm seeing market structure right here being respected creating you know lower highs and lower lows but right here i'm starting to see a little bit of consolidation so at this point you could close your trade there's no reason holding it if you're seeing a break in market structure and right now you're up 20 25 pips you know market's been open for an hour and a half
• 12:00 - 12:30 is it gonna continue in your direction who knows but you know that you're up 25 pips so what i'm saying is it's okay to close a trade early but at this point what you can do is actually adjust your stop loss you know that it's respecting the 200 moving average and it's down trending so instead of having your stop-loss way up here to avoid the market breakout wicks you can now drop it closer to the 200 moving average or seeing as how your trade is already in profit you can actually set your stop loss to a little bit in profit that way
• 12:30 - 13:00 this trade is zero risk whatsoever even if it goes back down there you're still gonna make money so let's say we get it right there a little bit in profit our original take profit level was 50 pips it is now the end of our trading day our trading window that we've set up for ourselves from 7 am to 12 or whatever your trading window is and right now we're up 30 pips close your trade take your profits and look for the next trade you don't want to be holding your trade
• 13:00 - 13:30 like through to the next day because it might start consolidating here and have these weird spikes asian session might take it the opposite direction 100 pips and you will have no idea you know what's going on right now because you're watching the charts take your profits and then wait for the next day it's as simple as that so you didn't fall for the trap you got your profits you adjusted your stop loss so it's no risk trade and that's how you back tested this one trade you did full analyzing on price action and you focused on one pair now we crank up the speed and we go
• 13:30 - 14:00 to the next day okay so this is the next trading day we can see our brackets showing up now we're going to be looking for our entries and look at what has been happening here we've been dancing along the 21 moving average still trading below the 200 but it is consolidating like crazy when it's consolidating like this i tend to not trade it because i don't know if it's gonna spike up or spike down so i wait until i see that rejection and spike in that direction sometimes it won't
• 14:00 - 14:30 even happen throughout the day and that's a no trade day for me because i only trade that pair okay so we've broken away from that 21 moving average we've seen this nice bearish movement but again you don't want to fall for a trap so what you want to be doing is waiting for a confirmation of this it might actually come back up and test the 21 day moving average if we have that break and retest and then a continuation on the downside then we can get in on a short position if not you do not trade that day you have specific rules that you set up and you do not get into a trade unless
• 14:30 - 15:00 that trade meets all of your rules okay so we are now testing the 21 moving average again but what it's doing is actually breaking market structure so you can see market structure was higher highs higher lows and now we're spiking above that and this high has broken this high so we've broken market structure so we may actually be looking for a break of this 21 moving average up to the 200. so this is the trade that i'm looking for i'm going to scalp between these moving averages and boom like nothing happened here nothing that i
• 15:00 - 15:30 liked happened here so i did not trade this day okay so we're at the next day we're still consolidating like crazy i'm not really liking what i'm seeing here i might not even trade this one as well and you need to keep that in mind that not every day is gonna have a trading opportunity for you do not force a trade because when you force a trade you fall for a trap because you're you're just hoping at that point you're not analyzing i mean look at how close this 21 moving average is to the 200
• 15:30 - 16:00 moving average this is a clear sign of consolidation you want to see a nice fan out in a direction now you can see the entire trading window that i have that 7 a.m to 12 p.m that whole window was a consolidation basically of 19 pips i'm not getting into a market that's moving that slow whatsoever okay so this back test is gonna be a little bit different because my camera died while i was recording but essentially what we're seeing here is
• 16:00 - 16:30 this i've already played it out so we started to see this nice drop in price over the new york session a little bit of consolidation over asian session but now we are trading above the 21 moving average so we're starting to see a trend reversal we're starting to see the price go in that direction i don't know if it's gonna have a huge continuation up but i don't care what i'm looking for now that my trading day has started right here i'm looking for rejections off of the 21. so i see these rejections start to happen right here here and here
• 16:30 - 17:00 so i'm placing a trade right here on the 21 moving average targeting the 200 moving average i'm keeping my stop losses at a nice distance away from previous lows because i don't want to get wicked out so keep your stop you don't put your stop loss here you put it a nice comfortable distance below this is gonna be a one-to-one risk toward ratio because the 200 moving average is so close so i'm targeting this i let it play out and boom sure enough it goes up to that 200 moving average
• 17:00 - 17:30 i close my trade and i walk away i don't care what the price is gonna do after it because you don't wanna have like buyers or sellers remorse so of those last few back tests that i did two of them i did not trade at all and two of them were winners so as you can see you're not going to be trading every single day and when you're back testing you should be doing it according to your rules so a recap make brackets around every single trading window for the last 100 days have a rules-based strategy where you do not get into a trade
• 17:30 - 18:00 unless you see these things happen you need to be systematic about it then do not force a trade do not trade on times where you do not see all of your things line up for your rules-based trading then once you've back-tested your strategy a hundred times you have a specific win to loss ratio if that number is good for you and you have proper risk management with your risk to rewards on your trades then you can start forward testing it on demo you want to forward test your strategy for a week two weeks or whatever on demo be consistent
• 18:00 - 18:30 trade only during those times and see what your results are on demo if you're in the blue put in real money and start doing it for real stop watching those stupid back testing videos on youtube where they're testing every single occurrence when it doesn't even relate to the time frame that they're trading they just want to show you results i'm showing you the practical way of back testing and this is what you should be doing if you guys are still watching this video that means that you like the videos so if you don't mind smash the like button just below my face consider subscribing
• 18:30 - 19:00 if you have not already and we will see you in the next video