Along with testing forex strategies, we are very interested in developing them. The reason is simple. We love research! And in Forex, testing is research.
However, researching strategies is a separate big topic. So we have set up a separate web site for this: forextradingstrategieslab.com.
In everyday life, most of the testing is usually done when the product is already designed. And this in turn comes after research activities are completed. Testing is more of a rutine procedure, intended to validate that the product works as designed. The feedback from testing is expected to reduce design and implementation defects.
Developing forex strategies is different. In Forex, there is no such thing as a “design defect”. This would imply that there is such thing as correct solution. Whereas any Forex strategies can fail. So strategy testing needs to research these failures and try to understand their root cause. And next, either identify the limits or suggest improvement ideas for the strategies to be statistically more profitable.
Forex Strategies Research By Testing
Before researching something, it is good to know what we are researching. What exactly is a Forex strategy? Wikipedia defines a trading strategy as a plan of making a profit in the markets by taking a long or short position.
This is obviously correct, but needs more detail. We would like to add that a strategy consists of a set of unambiguous rules when to enter the market, and what fraction of available money to invest; then, when to exit, and exactly how big percentage of invested money to take out of the market.
Obviously, the market entry and exit timing is the core of any trading strategy. Managing risks by manipulating sizes of invested lots can’t make up for wrong decicions: if your trade is a loser, it will be a loser regardless of how much was invested.
Due to this, developing and testing Forex signals and also investigating the conditions where they can be profitable are areas of our primary interest.
Forex Strategies Benefit From Automated Trading
Why only 5% of the Forex traders systematically makes money? It is broadly agreed that the root cause is the human nature. Forex trading is very stressful. Often people are forced to make emotional decisions. Many lack self-discipline to follow their trading strategy.
Automated trading is a logical way to reduce the impact of human factor. However, before we grant our robot full power of making trading decisions, we must trust the implementation of the trading strategy it runs. Which brings us to the importance of forex strategy testing, for automated and manual trading alike. In manual trading, quality of the trading strategy proven by testing should also help a trader to fight the stress.
In addition, compared to manual trading, testing Forex strategies designed for automated trading system can be itself automated. Which automatically implies much better productivity. We develop our testing tools and procedures for automated trading.
Another advantage is that testing can be done with less raw data. Same market patterns are observed on different timeframes, and automated testing system has no problem using the shortest timeframe. However, this works the opposite direction as well – testing results can be used for the longer timeframe. Which means the testing recommendations can be reused for manual trading as well.