How Long Should You Be Backtesting Forex

How long should you be backtesting forex

I am frequently asked how long one should backtest a trading system.

How Many trades Should You backtest?

Though there’s no easy answer, I will provide you with some guidelines. There are a few factors that you need to consider when determining the period for backtesting your trading system:

· Trade frequency
How many trades per day does your trading system generate?

How long should you be backtesting forex

It’s not important how long you backtest a trading system; it’s important that you receive enough trades to make statistically valid assumptions*. If your trading system generates three trades per day, i.e.

Step One: Get Caught Up

600 trades per year, then a year of testing gives you enough data to make reliable assumptions*. But if your trading system generates only three trades per month, i.e.

Forex factory calendar parsing

36 trades per year, then you should backtest a couple of years to receive reliable data.

· Underlying contract
You must consider the characteristics of the underlying contract. The chart below shows the average daily volume of the e-mini S&P:

It doesn’t make sense to backtest a trading system for the e-mini S&P before 1999, because the contract simply didn’t exist!

How long should you be backtesting forex

In my opinion it doesn’t make sense to backtest an e-mini trading system before 2002 because at that time the market was completely different; less liquidity and different market participants. I believe that a reliable testing period for the e-mini S&P are the years 2002 – 2004.

* What is “statistically valid”?
Recently I received an article from a Ph.D in Statistics.

How long should you be backtesting forex

He explained the correlation between the sample size and the “margin of error” in the table below. The bigger the sample is the smaller the margin of error, but usually a sample date of 200 trades should be sufficient. If your trading system generates enough trades, then you should use 500 – 600 trades.

For more information visit RockwellTrading.com

How long should you be backtesting forex