You don’t necessarily need full blown strategy to start back testing. Because no strategy goes into my real money account before a solid multi year backtest. This is what I did. I hope this will help you come up with a new strategy or tweak your exciting trading strategy.
When you start to work on your Forex trading strategy :
- Decide if you would like to come up with one of the following ( if you are new, stick one of these until you have mastered this)
- Trend Continuation
- Trend Reversal
I would advise newbies to start with Trend continuation since Reversal are bit more complicated and you need to take a lot of things into consideration.
I picked trend continuation. From here it’s an open playing field. But keep in mind that we are still building a strategy. I’m a technical trader who uses candlestick signals, trend line, EMA’s and Support & Resisntace levels to alert me on a possible setup. That said, for now you are going to focus on two candlestick signals.
Let keep it simple and focus on Engulfing candles and Hammer Candles(aka Low/High test candlesticks)
Now that you know what type of candles sticks you will be focusing on, let’s get deeper into the strategy building part.
I will be discussing a LONG(Bullish) strategy but reverse this if you want to build a SHORT(Bearish) strategy .
In order for price to confirm that we have a bullish trend we need to see price making at higher highs and higher lows
Using a web application such as Tradingview you will go back in time on a Forex pair to point where the price has a Higher Low and a Higher High.
At this point once price has formed a higher high, we analysis how price hs acted. Most of the time following a higher high price would pull back to a key level.
This level could be a previous resistance point, now turn into the support level or a key Moving Average. This is where you need to be creating and start adding and removing Moving average(MA). In my opinion keep it simple and stick to 2 -3 MA’s.
For an example let say once the price formed a Higher high price pull back to a 20 MA and a support level and printed Hammer candle stick signal. In your next step you want to go back in time may be 3 -5 years check to see how price acted every time your criteria was present.
NOW THE BACK TESTING STARTS.
You want to document every win and loss to understand the W/L Ratio. You can even add an indicator such as MACD, Stoch and RSI as an added level of confirmation.
All in all keep the indicator to a minimal and
NEVER GET INTO A TRADE BECAUSE YOUR INDICATORS LINED UP. PRICE IS KING.