Trading, like many other things in life, can be improved upon with experience. This is often where new traders fail. Once realizing this fact, they look at a very simple negotiation. But not everybody would be in that boat. The difficult thing about experience when trading is the fact that that very same experience can cost us money.
But there are other ways of earning experience in the age-old art of speculation. This is akin to demo trading today; a way that we can test our theories and strategies on the market without financial risk. The downside to demo trading or demo-testing a strategy is the fact that it may take a long time to get enough results to make a determination for my strategies consistency. If I want to test a strategy on a daily chart, it may take me an entire year just to place a few trades.
This is where manual back-testing can come into play. This is a mannerism in which I can simulate a live market environment with dynamic prices. The reason I am doing the test is to train myself, using the tools of the strategy being tested, so that I may know how to most effectively employ the approach. I can do this on any timeframe, with any currency pair, and almost any strategy that I trade. The first step when manual back-testing is to dress our charts up with the indicators that we will use in the strategy which we are testing.
After getting the chart dressed, we are ready to proceed. After we have our chart dressed, we need to go to a previous period on the chart. The here is that I want to be unfamiliar with price action for the tested period.
I want prices to be as close to the dynamic of a real market as possible. I want this to be unpredictable. To do this, I can simply click, and drag back in time to get to an earlier date on the chart. This feature is very beneficial to traders that do a lot of manual back-testing, but often unknown to many. This is an extremely convenient feature that can allow me to traverse a vast distance on the chart in a short period of time.
At this point, I want to walk forward on the chart u ntil a I find a trade that meets my criteria. This step can deviate between trader to trader based on style and mannerism of record-keeping.
I urge all new traders or those new to manual back-testing to write each of these trades down; whether it be a journal, a spreadsheet, or a trading log. Some key information is of note here: You can record all this information, as well as any other observations that you have made.
After a few trades, you will have a few pieces of information you can use to then make the strategy more effective for your goals. After we have found a hypothetical trade, at that point we can walk further forward in the future to get an idea for how it may have worked out. Once again, we can record these results in our journals. Then we can move on to the next trade. We can continue to do this until we feel the comfort, and the experience with the strategy to move on to the next step of testing.
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