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back testing is the best way to figure
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out if a strategy works or not
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professional Traders back test their
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strategies before risking real money so
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if you want to become consistently
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profitable you should back test your
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strategies also hi my name is Hugh in
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this video you'll learn what back
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testing is I'll show you the complete
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process of how to backtest you'll learn
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the best software to back test with I'll
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show you specific examples of a back
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tested strategy and you'll also learn
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how to improve a back tested strategy so
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you can get better results the back
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testing process will work in any market
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and on any time frame alright let's get
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into it
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[Music]
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all right let's start with what back
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testing is so back testing is basically
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the process of taking a training
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strategy and testing it on historical
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data so you're basically going to scroll
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back on your chart
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to whatever period of time you want to
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back test and then you in trading view
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you can use something like the replay
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button and then you're going to move the
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chart forward slowly and that and then
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once you see a setup in your training
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strategy then you're going to take the
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trade and you're going to record the
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results and this is very similar to
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something like what a car manufacturer
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would do right before they release a new
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model of car they're going to test it
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out to make sure that it works make sure
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that there aren't any major issues with
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it and they're going to make sure that
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it's reliable so it's a similar thing
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with trading strategies you want to make
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sure that they have an edge and the only
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way that you can show that they have an
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edge is to use historical data to test
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the strategy all right now let's get
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into the specific steps on how to back
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test your strategy the first thing you
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want to have is a goal a lot of people
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will access the strategy and they don't
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have a goal so they don't know what kind
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of strategy they want or what kind of
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return they want or what kind of
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performance or drawdown they want so
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make sure you set your goals and your
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strategy do you want to make a certain
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percentage a month a certain percentage
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a year
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certain percentage over five years and
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make sure to match your goals to the
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lifestyle you want to live and the way
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that you want to trade a lot of Traders
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coming to trading thinking they are
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going to be day Traders and they're
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going to make an x amount of money every
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single day when in reality they are
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probably better swing Traders and
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they're better off for shooting for a
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certain average percentage per month so
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just think about those things think
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about how much you actually want to
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trade and set a realistic return based
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on that
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next create your trading plan so this
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has to be a written trading plan with
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the rules of your strategy and there are
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certain discretionary elements so some
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trading strategies so write down those
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rules the best you can also and put that
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into one document detail everything in
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that document so that when it comes time
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to take a trade you know exactly what to
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do the next thing to look at is
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what kind of software you're going to
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use to backtest there's a lot of back
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testing software out there I'll get into
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some specific Solutions in a little bit
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but remember that using software will
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make your job much easier especially if
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you can track the stats with that
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software and then after you run a back
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test you're going to want to analyze
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your results obviously see if it meets
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your goals see if there's a way that you
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can maybe make it better look at some of
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the stats like drawdown can you handle
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the drawdown yeah maybe a trading
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strategy made 500 but could you handle
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like a 90 drawdown right so those are
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the things that you're going to have to
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look at and make sure that you can trade
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that strategy and it will fit with your
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personality and finally once you're done
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analyzing your results you can look for
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ways to possibly improve your strategy
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can you make it better can you do some
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tweaks to the entry to the exit maybe
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the profit Target could be bigger things
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like that and just play with it and see
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if there are any ways that you can make
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the strategy better and fit your goals
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if your strategy tested out well and
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you're ready to move on to live trading
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then that's great usually you're gonna
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have to do some improvements on a
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strategy rarely does it work the first
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time but if it does or if you did some
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improvements and it did work with the
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improvements then you can move on to
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demo or trading a small Live account and
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this is because not all systems that
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work in back testing are going to work
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in live trading there may have been some
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assumptions that you made in back
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testing that don't translate over to
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live trading that's why it's important
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to at least test the strategy out for a
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little bit either in a demo account or a
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small Live account now let's take a look
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at the types of back testing so there
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are basically two types of back testing
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automated back testing and manual back
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testing so an automated back testing
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you're either going to write a computer
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program or you're going to use a program
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Builder that will create an automated
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trading strategy either way the computer
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is going to trade 100 for you entries
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exits and everything with manual back
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testing you're going to actually
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manually enter each trade just like you
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would if you were live trading and
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there's a little gray area in between
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where you can do some semi-automated
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back testing but those are the main two
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camps and a lot of people think that in
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order to back test you have to have an
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automated strategy or you have to know
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how to code and that's simply not true
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you can do 100 manual back testing and
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that's great and that works sure it's a
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little bit slower but there are some
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strategies that can't be put into an
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automated trading strategy so I believe
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that
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it's best to start off with manual back
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testing because that's something that
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everybody can do and then if you want to
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move into more automated Solutions you
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can do that but a lot of people haven't
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studied programming and they don't know
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how to code so starting with manual back
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testing is easier they can get results
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right away and then if they want to
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learn how to code or if they want to
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apply their coding skills then they can
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get into automated back testing now
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let's take a look at creating your
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trading plan so your trading plan is
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basically going to be all of the
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elements of your trading system when you
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should enter a trade where you're going
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to set your take loss into a stop loss
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and take profit the indicators you're
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going to use along with the settings of
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the indicators
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when to manage your trade are you going
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to move the stop-loss to break even are
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you going to Trail your stop-loss down
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things like that
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and then finally your exit criteria how
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are you going to exit the trade where is
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your stop loss where's your take profit
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what indicators have to line up in order
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for you to exit the trade stuff like
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that now let's get into the software
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there are a lot of solutions out there
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the first one is metatrader this one is
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great because it's free it's more for
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back testing automated strategies
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although you can use it as a manual back
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tester but you're going to have to keep
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a separate spreadsheet for that one I
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highly recommend is naked markets I
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think it's the best back testing
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software out there because you can go
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from Full manual partially automated
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full automated and it allows you to
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automate certain parts of the back
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testing to speed things up
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without going full automated so I think
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it's a great solution it also gives you
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a lot of detailed stats that you won't
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get in other software packages and many
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times with those other packages you have
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to export the data from the software
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into Excel and then do your own analysis
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so naked Marcus has that already built
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in and I really like naked markets I
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highly recommend checking it out you can
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check out this video if you want to
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learn more about naked markets
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next one is trading view uh trading view
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in my opinion is not great for back
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testing it's fantastic for charting and
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trading but with trading view you can
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use the replay button and that can help
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but again like with metatrader
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tradingview is more built for automated
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back testing so I have an automated back
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tester but if you want to do manual back
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testing you're going to have to keep
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your own spreadsheet and your own stats
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one thing with the trading view
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automated back testing that I don't like
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is in some markets they don't have
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enough data so you have to be aware of
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that they're only going to give you a
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certain amount of data so be aware when
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you're back testing in trading view next
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is Forex tester I used to use Forex
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tester a lot but they haven't really
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improved over like version two I think
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is kind of where they hit their Peak and
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now it's just kind of like making small
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improvements but it's still a solid
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piece of software so if you want to
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check that out check it out in my
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opinion it's best for testing manual
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strategies uh it does have an automated
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tester in there but it's very similar to
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metatrader so I don't see why we just
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wouldn't use metatrader to begin with
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but four accessories been around for a
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long time and it's a really solid piece
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of software so check that out also uh
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ninjatrader I haven't back tested a
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ninjatrader I know some professional
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traders that use ninja Trader I just
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think it's a horrible interface
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um but it it works you know it does work
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you just have to learn the little quirks
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of it but that's something you could use
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ammy broker is fantastic Emmy broker is
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more for back testing stock trading
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strategies I have Amy broker I've been
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using it a little bit but I haven't
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really gotten too deep into it but if
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you're trading stocks and you need to
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generate signals on the stocks and you
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need to scan a whole universe of stocks
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then Emmy broker is fantastic next is
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soft4fx and this is a really inexpensive
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software it plugs into metatrader 4 and
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metatrader5 and it turns metatrader 4
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and 5 into a back testing software and
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uh it's you know it's pretty good at
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that but again it is a low-cost thing so
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it's not going to be super feature Rich
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but it does work so if you only want to
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spend I think it's 150 now or something
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like that
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uh something on the low end uh and it
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plugs directly into metatrader 4
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metatrader5 so that's an option if you
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want to use it I don't recommend it I
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think if you're better off spending a
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couple hundred dollars more and going
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with naked markets uh instead of soft
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for FX but that could be a solution for
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you and finally we have multi charts
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I've never used multi-charts
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um but a lot of people do use it for
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back testing it's mostly automated back
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testing so keep that in mind but that's
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also a solution you can check out
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all right if you want links to the
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software that I recommend that's
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provided in the description below now
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let's get into the actual process of
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back testing now there are a couple
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different ways that you can do this uh
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one way like I mentioned is you could
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use something like metatrader or some
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sort of free charting platform you could
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use a spreadsheet
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to keep track of your trades and if you
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want a spreadsheet I'll post one here
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but if you really want to speed things
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up you should use dedicated back testing
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software and this is naked markets this
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is my favorite back testing software uh
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so what I'm going to do here is I'm
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going to test a simple system that uses
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a moving average crossover all right so
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I'm going to set my rules step number
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one is always to have rules for your
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training strategy so this trading
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strategy is going to have the 200 simple
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moving average the 50 simple moving
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average
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I'm going to enter in the direction of a
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crossover the stop loss is going to be
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at the 200 simple moving average and I'm
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going to exit when the crossover happens
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in the opposite direction so here's how
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this works I've added the indicators to
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my chart so I'm going to hit the play
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button here and I'm going to let the
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chart scroll forward until the 200
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simple moving average shows up
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all right there we go now I'm going to
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look for a crossover
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there we go and a good thing about Nikki
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Marcus is that they have a uh moving
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average crossover indicator so you I
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think you can see here there's an arrow
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pointing down so that's a bearish signal
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I'll zoom in on that a little bit
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right so I want to go short right there
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so according to my rules I'm going to go
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short here and then I'm going to place
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the stop loss
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at the 200 or maybe just a little bit
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above the 200 simple moving average
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there we go
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and I'm going to risk one percent per
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trade so let's go okay stopped out
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immediately that's okay
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all right there's another signal
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so uh there's the indicator okay so I'm
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gonna buy there stop us is going to go
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down here
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risking one percent yep okay and go
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okay so that's working out better
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just waiting for the crossover in the
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opposite direction now
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okay there we go and I'm moving the
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chart forward really quickly just
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because this is an example and I want to
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speed up the video but in real life you
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should probably make it slower so that
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you don't miss these signals uh but this
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is a straightforward training strategy
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so missing the signals is not a big deal
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with this one but with other strategies
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you should probably slow it down so that
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you don't overshoot it so you don't have
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any future information about the trade
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all right so I'm gonna sell here I'm
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gonna
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put a stop loss up here
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and then I'm going to let that go
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see what happens
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okay so that worked out pretty well
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oh I forgot to okay
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I forgot to close the trade here that's
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why I triggered on there
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okay so I'm going to close this other
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trade out which made about 4.5 percent
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all right now let's go forward here and
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that's a good thing about back testing
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you can back up and correct your
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mistakes if you have any all right
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waiting for the next crossover
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okay so this trade would have been open
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for a while
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and you can test this on any time frame
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you don't have to do the daily like I
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did here uh you can do the one hour you
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know whatever five minute and you could
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really uh create more trades out of it
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but uh this is just the example I'm
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using so crossover should happen soon
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there we go nailed it okay so that
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it's going to get closed and then I'm
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going to open along here
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stop loss is going to be down here
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and we'll go for one more trade
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all right very nice
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so again this trade is going to be open
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for a little while
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uh but it is picking up some pretty good
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profits so I'm gonna let it keep going
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and this will be the last example so
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it's okay if it's a little bit long
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wow okay this one is really long
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but it is uh it is profitable let's
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see where the profits end though
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okay there now it looks like it's going
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to break down so I'm just gonna
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go forward and there we go that's the
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closing
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signal and that's it for this back test
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at least for this example so next thing
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you want to do is look at your stats how
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did this perform now I I didn't do a
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complete back test here so I would want
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to do a complete back test then I'll
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look at the stats so I'll save this back
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test first and then I'll go into the
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statistics Dot Center
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I will import it from a back test and
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the back test is
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golden death
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Euro US dollar okay and there you go
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that's the statistics on it
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the first year it lost one percent uh
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and then after that it was profitable
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but again this was just an example so
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you want to back test this on as much
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historical data as possible uh to see
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how this would have performed over you
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know 5 10 15 years so some other data
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you can get in here is some overall
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stats you can get like sharp ratios and
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daily averages and things like that you
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can get the symbol analysis there was
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only one symbol in this test but you
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could test multiple symbols at the same
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time if you wanted to timing analysis
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you can see where the winners and losers
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were in terms of month day and hour
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and then you can see uh the duration of
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the trades
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you can see the risk analysis and the
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trades list and then you can do a Monte
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Carlo simulation on the data now if you
00:16:09
want to get my complete back testing
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course you can check the link in the
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description below and that will give you
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the full program on how to do a complete
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back test along with some trading system
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examples so this is where this type of
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software is really useful because it
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gives you statistics and you don't have
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to go into Excel and make them yourself
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so now that you know how to back test
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the strategy and you know how to look at
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the statistics on it now let's get into
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optimization all right once you're done
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with the back test and you have some
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stats now it's time to look at some
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potential optimizations one thing you
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can do is set the stop loss further away
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or closer a lot of Traders will tend to
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set the stop loss too close and they'll
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get stopped out often so if you move the
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stop loss a little further away that
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will give the market some room to move
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and you're more likely to hit your
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profit Target another potential
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optimization is to set a bigger profit
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Target so you'll win less often but your
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winners will be bigger so sometimes that
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those bigger winners can offset your
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losers and that can be a great way to
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potentially optimize your strategy then
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you can also Trail your stop loss I have
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some videos about the trailing r or
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there are multiple trailing stop loss
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and you can use things like the PSAR or
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the um
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uh under other indicators that will
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allow you to try your stop-loss you can
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also use Simple support and resistance
00:17:25
that's a great way to do it so you could
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do that and then another thing you can
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do is you can take one strategy but have
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two different sets of settings so this
00:17:35
might not make sense at first but when
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you actually get into it and you realize
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that if I use this one set of rules and
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then a slightly different set of rules
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but a very similar system sometimes they
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will
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compensate for each other so if this
00:17:51
system has a loss sometimes this system
00:17:53
will have a win and vice versa so that
00:17:56
can be a great way to smooth out your
00:17:58
profit and loss curve and make more
00:18:00
consistent profits all right so that's
00:18:02
how you back test the trading strategy
00:18:03
if you want a complete guide on how to
00:18:05
do the entire process check out my back
00:18:07
testing program that's going to be
00:18:08
coming out soon that will lay out all of
00:18:10
the steps it will give you some
00:18:12
strategies to backtest along with
00:18:14
complete results and it will show you
00:18:16
some of the tricks and some of the
00:18:17
things to avoid when back testing so you
00:18:19
can become a master bathroom tester and
00:18:21
find profitable trading strategies
00:18:22
alright if you like that video give me a
00:18:24
thumbs up share it with your friends if
00:18:26
you want to get more videos like this
00:18:28
about training strategies and back
00:18:29
testing subscribe to the channel hit the
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Bell to get notifications thanks for
00:18:33
watching and I hope your trading is
00:18:35
going well
00:18:37
[Music]
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