How to Test Foreign Exchange Systems

Anybody who has been around the currency market for at least two mins knows that you always have to test currency exchange systems before you go live with them. Whether or not the system includes guarantees, even if you got it from a top trader who makes millions with it, you have got to know that it will work for you.  

So why do systems like Forex Twister work for some folk and not others? Many folks basically find this quite hard to believe. They imagine there’s one perfect system out there that fits everyone and could make us all into millionaires if only we knew how it’s possible to get a hold of it. But that idea is a total fantasy.

There are many reasons why a system might suit some folk and not others. It could involve some skill like interpreting a complicated 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 might be to do with risk : the system could involve going to an amount of risk which would be way outside some people’s’s comfort sectors, leading them to either subvert the system or make mistakes due to the level of stress.

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

First you may use backtesting. Here you take your system and work out on paper how well it would have done on the recent historic market, i.e. The last six months or whatever period you choose. This does not take too much time as you can swiftly scroll thru historical charts searching 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 the same way so you do need to take into consideration the proven fact that you may have struck lucky or unfortunate and picked a time when the system performed unusually well or badly.

For that reason, it is best to backtest over the longest possible time and perhaps split your tests so that instead of testing, as an example, one entire year when the market could have been especially powerful or weak, take the first quarter of year one, quarter 2 of year two, etc so that you test one 3-month period from annually of four years. This gives you a good period spread without requiring you to cover four full years.

The second way to check 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’ve got to wait for your signals to come up for real . On the other hand, it simulates real live trading methods with the chance of slippage and other factors which aren’t gong to show up in back testing.

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

Forex demo accounts also have the edge 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 at present when you go live with real money. Most foreign exchange brokers will provide free demo accounts which you may use to test foreign exchange systems.