Forex Strategies

Forex testing on historical prices – is one week data enough?

We receive questions from time to time on why our Forex testing tools only support one month of data. These questions obviously arise because Smart Forex Tester and Simulator GUI has a tab with one month calendar.

As a matter of fact, both Tester and Simulator can work with unlimited data.

A monthly calendar view was added to provide an easy way to select when to start the test (stopping the test can be obviously done any time).

But on this occasion, it would be good to discuss here whether we really need big data files in Forex testing.

The only argument in favor that we can imagine is the need to test strategies that use long time frames.

But if we really wanted to use such strategy, does it make sense? Do we have enough time for that? And even if we do, we need to have a lot of money invested to satisfy margin requirements. Unless you trade with large sums without any leverage.

And even more questionable are the benefits of testing on the long intervals for the most commonly used optimization methods, when a given set of strategy parameters are permutated to make the strategy work best on the historical data.

Unfortunately, it doesn’t guarantee the strategy will win when used the very next day – whatever long interval you tested it on. This is the reason we use a principally different approach.

We are developing the mechanism to adjust the strategies to the current market automatically on the fly. So, we test our automated trading strategies on 1 week long test data.

There are several reasons behind this testing interval selection. The primary one is continuity in the price quotes. If you leave a position open over weekend, you always risk hitting a price gap. If something happens during the weekend, the gap can easily be several hundred pips. And stops sometimes can not be even triggered.

Next, it takes reasonably short time to run a test on one week of quotes. is not too long to run.

Of course, big price moves can happen during the trading week, as well. However, it’s not a gap – but a very fast moving market. So you might be able to do something yourself and stops might work.

In addition, quite often such turbulence is news related and so can be predicted, as the major news releases are mostly scheduled.

Our approach is to use one week as a standard interval that is easy and quick to run and analyze. Based on the analysis, we select certain data intervals that are worth using later. Mainly, those where the strategies loses systematically.

Only these intervals are worth testing on. Markets quite often just treading water. Testing on such data is just wasting time.

So we prefer to collect a set of test cases that represent the market conditions that are difficult for the strategies to handle. Running the set is an efficient “smoke test” – if the strategy is failing, there is no need to go deeper and run longer tests.

Based on weekly test results, we can select most important parts of the data and us them later as test scenarios. They can be as short as one trading session. Often the market behavior is the same during one session, but the next session might not continue the pattern.

Best is to test overlapping new York and London sessions when the moves are most powerful.

You can use our free Forex Data Manager to slice a month long .csv data files into one week (or smaller) ones.

Smart Forex Tester Free Version At SmartForexTester.com

SmartForexTester.com is our new site that we started to host a free version of our new Smart Forex Tester product.

We already released paid version in the end of 2016. It is built on the new framework – the same we used to develop our Forex Simulator.

The new free Tester version will replace the currently available 0.9.5 software which was developed on the old framework and will be phased out.

Smart Forex Tester Free — Smart Forex Tester free version is released

As the old Tester, the new free version also uses tick-by-tick data only and can test on both historical price quotes and using inbuilt live market data feed.

Considerable improvement is added C++ support – as a means of trading strategy definition.

Also, you can use C++ environment to test EA if you have a source code. After some modifications, MQ code can be compiled in the Tester, and the interfaces are provided similar to MT to support trading operations.

Free download at SmartForexTester.com.

Forex strategy back-testing: how much historical market data is enough?

How much market data do you need for a Forex strategy back-testing? What time interval is long enough to run tests?

One obvious consideration is that it depends on the time frame you use for trading. You need to have many data points for your selected interval, to be able to make any judgement.

The longer the time frame is, the more data you will need. E.g. for M15, one hour of ticks will only give you 4 bars. For H4, you will need to have almost one day of ticks to get the same amount.

Another consideration is, how long are you going to be in the market. This depends on how you trade – do you use leverage or not. If you use leverage, it is very risky to keep a position for long in certain cases – e.g. over a weekend, as there can be a big gap at the opening. To say nothing of news release times.

These considerations should give us some idea on the minimum and maximum data interval we need to test on.

But let’s assume we have all needed tick data available and don’t have any restrictions coming from leverage. And we just want to understand, how much data do we need to test on, exactly? When should we stop testing?

The answer to this question is – it depends on the trading strategy. For the strategies that doesn’t adapt to the market (“static”), no testing can give any guarantee of success.

You can optimize the strategy parameters on 3 years data for several pairs – and it still can start losing the next day.

This is why we are working on the dynamic Forex strategy optimization. This approach requires much less test data, as well.

Basically, for the dynamically adapting strategy, you can move from “extensive” testing on long intervals, to “intensive” one – using price patterns as “test cases“. These test cases should simulate the market conditions where trading strategies were noticed to consistently lose.

This approach also saves a lot of time, as we can only concentrate on the essential behavior of the strategies.

Smart Forex Tester will support running of test batches in summer 2017.

Forex Strategy back-testing with Smart Forex Tester 1.0

Smart Forex Simulator To Include The C++ Strategy Tester

Smart Forex Simulator will be a new product built by merging current Forex Simulator and Smart Forex Tester.

One rationale behind this change is to improve user experience.

Merging will also make the tool development more efficient, because both current tools share a lot of the same code.

After this change, the tool will no longer be usable without a license.

However, the basic functionality will still be free. So the current users can claim their free licence. Or upgrade to get the premium features.

The following licences will be available:

Online Simulator – free. Offline Simulation and Timeshift in Real Time – paid.

Strategy Tester – free. Max test speed and manual trading operations – paid.

Online Simulator AND Strategy Tester – paid.

Forex trading strategy description – is EA the best way?

You should have your Forex trading strategy description – even if you trade manually. And if you do auto trading, it is a must.

It is safe to say that the majority of amateur traders use Expert Advisors (EA) for automated trading. Why? Because it is a convenient way to interface the market via Metatrader trading terminal. And it is free.

What is EA exactly? It is essentially just a computer program, written in a proprietary language that is very similar to very popular C++, which is not the easiest thing to learn.

However, not all of us are computer programmers. And not all of us even want to master programming in a quite complicated language – just to be able to do the Forex trading strategy description ourselves.

Let’s also look at it this way. A lot of coding skills is needed essentially to program 2 relatively simple things.

decide when to enter the market
decide when to exit the market

You might say that we may also need to decide how much to buy / sell. We can argue that, at least in trading strategy testing, this is already a secondary priority. Any risk management won’t compensate for wrong entry or exit decisions.

Using this simple approach, we can understand that the best Forex trading strategy description should not need to be programmed each and every time.

Instead, we can just use a simple logical blocks to be able to define our strategy . The idea is that an average person – who is just able to think logically, but not having any programming skills – can understand it easily.

That said, of course, we need to develop the blocks themselves. But it’s one-off effort and you don’t have to do it yourself.

It’s like Lego – you don’t have to create the blocks yourself – just use them.

This is the approach that we used in our Smart Strategy Tester from the very beginning. The 0.9.x series used state machines for trading strategy description.

The all-new Tester 1.0 will bring it to the new level. It provides C++ environment, that we can use to program a trading strategy. But in the next releases it will also provide the way to program and use the blocks discussed above.

Forex Trading Strategy Description in Smart Forex Tester 1.0 — Smart Forex Tester 1.0 – Trading Strategy Description

Forex trading automation: replacement or assistance to manual trading?

Forex trading automation is an attractive option.

The benefits of automation are obvious – you are not chained to your computer and it gives you much less stress. To say nothing of the fact that a computer reacts to opportunities and executes trades way faster and better than you.

The downside of trading automation is also obvious. It is not that easy to develop an algorithm that fully replaces you in all sitiuations.

A question: why can’t we take the best of both worlds?

We tried it with our latest Smart Forex Tester 1.0 software. It has an option to manually override when an automated trading strategy is being run.

Trading automation was represented by a simple strategy that uses 3 RSI of different time frames to enter or exit the market, This strategy obviously only works well when the market is not trending.

For the calm markets, a typical situation where manual control was needed was around the peaks. There was usually a great deal of see-sawing there. And it was not clear whether a peak will hold.

Even such simple algorithm as we used could enter the market well. But fixing the profit was more efficient and easier manually. You could take less risk and if it was not sure the market goes where expected, you usually had a chance to close the trade with a small profit during the see-sawing. Or even small loss was a better option in an uncertain case than relying on a fixed automated stop-loss.

However, the main benefit of the manual control was during the beginning of the trends. Our simple 3 RSI algorithm works very badly on trending market. It will persistently try to enter the market in the direction opposite to the trend and will be stopped out a lot of times.

But even with such a simple system, you can still be successful. Once you notice a trend starting, you can disable the automated strategy and manually take a position in the direction of the trend and just hold it. When the trend is exhausted, you can return the control to the trading atomation.

Can We Predict The Forex Market? The Only Sure Thing

Indicators seem to predict the Forex market at times. However, it’s difficult to turn this into profit.

A typical example of that is overbought conditions in oscillators. So, if the RSI is already very high (over 80), this condition points to reversal. But the problem is in timing. If you followed markets for some time, you know that such powerful trend can go on and on.

Siimilar situation is with Elliot waves. Even though we might have a very clear impulse wave pattern, the moment of reversal is hard to pinpoint. It is known that 5th waves can quite often be extended.

So basing the trading on indicators is difficult. In addition, the indicators are widely known, so a lot of traders might wait for the same event. And it is known that when market is commonly expected to go in some direction, it quite often behaves completely differently.

The only sure thing we can predict in the Forex market is that there will be ups and downs. Regardless of the market direction. Ups must be followed by downs and so on. This comes from the nature of the market – price discovery process.

The shorter is the timeframe, the better your timing can be. But if you try timing on e.g. M30 graph, you might lose hundreds of pips before the reversal occurs.

On the other hand, using the tick graph, even if you can time the reversal, you can’t tell the big picture. The pivot point can just be a local extreme.

In our opinion, the only way to tackle this is to react very quickly by generating pivot points signals on the tick graph and then use them to predict the action on longer timeframes.

You will never predict all market movements but you might be lucky more often than unlucky. You just need to be faster than others.

Many try to act only when market starts moving in a certain direction. This is already late. Here automated algorithms are the only way to go.

Trading manually, you can’t react as fast and – most importantly – equally error free for long time. To say nothing of the natural needs to do breaks.

We are developing the price actions algorithms that can be used for trading automation. We based them on our own pivot points detection algorithm. The figure below show the sample results of the detection in real-time.

You can try it with our Pivot Points Analyzer software (free download).

How To Make A Living Trading Forex

Review of a book by Courtney D. Smith (2010)

This is absolutely a must-read book on trading Forex. It only concentrates on essential and is pleasure to read.

The author has been working as a professional trader over 20 years and he made all of these years profitable. And he assures he has never traded more than 15 minutes a day.

He shares the approaches that was working for him or for other great traders. Repeating his techniques is no problem as enough details is provided.

Each chapter has concrete recommendations for implementing a strategy or making trading decisions. He favors position trading. But he also shared 3 proven day trading techniques.

He also gives 3 main reasons why people lose trading Forex and discusses in detail how to do risk analysis and optimize risk/rewards ratio.

Read our review

Forex Online Simulation Benefits From Timeshift

Our Forex Simulator development is continuing at full speed. The major new feature of the next release will be Timeshift, which makes it possible to pause/resume online simulation.

This simple example shows you how Timeshift saves your time.

You are at the airport waiting for your flight. You don’t want this time wasted, so you are practing with the online simulation. Now your flight is boarding. While you know it will take some time, still you can’t concentrate properly. Or your colleague invites you to have a drink while waiting.

Here is where the Timeshift comes in. You don’t stop your practice – you just pause it. It might take a while before you will have to eventually turn off your Internet connection. All this time the Simulator will continue receiving the market data.

Later, during the flight, when you have time, you will resume your practice. The Simulator will use the recorded price data. This way, you will get back the time that would have been wasted if you didn’t have the Timeshift.

There is more in our development queue. E.g. the market data collection can not only be used for Timeshift. You can record a trading session while you are at work during daytime. And then use the recording and practice on it while commuting home.

We are also designing trade recorder/player for you to analyze your practice, multiuser mode to practice together with your friends and other cool features.

To make the Simulator that meets your needs, we need your feedback!

Please do take a look on our roadmap and vote – this way we will implement the most needed features first. And if you want to suggest a feature – don’t hesitate to leave a comment!

Live Forex Signals By Smart Forex Tester

Live forex signals can be generated for free with our Smart Forex Tester.

When we run the Tester on real-time market data feed, we can trigger automated forex signals every time when our day trading strategy is entering or exiting markets.

Signals are short sounds. They can be turned on or off in the Tester GUI, and the tunes can be configured for each of the market events.

Live Forex Signals By Smart Forex Tester — Sound-button turns on live Forex signals

The live data is sent to the Tester by our Forex Simulator, which in its real-time mode supports 10 main currency pairs. This short video shows how the Tester and Simulator work together. (The signal is at 3.10)

Alternatively, the Tester can receive live market data from a Metatrader client terminal via a special Expert Advisor. This EA you have downloaded together with the Tester.

The automated day trading strategy is also included in the Smart Forex Tester download bundle. It uses our unique algorithm to detects market pivot points in real time.

How accurate are the signals. The current version of the strategy works the best on the rangebound markets. However, it can also generate profitable signals on moderate trends. We are working to adapt the strategy for the trending market.

The Tester GUI provides you the controls to change the main strategy parameters. So you can experiment with them to adjust to the current market situation.

Want to try yourself how accurate these live Forex signals are?

Subscribe for free to download Smart Strategy Tester and Forex Simulator.