In 2022, forex trading has become one of the most convenient markets that you can jump into. The forex market is highly liquid and trades around $5 trillion a day, meaning that small movements in the market can trickle down the economy and your portfolio. Moreover, despite recent economic turbulence caused by multiple factors such as the Russian-Ukrainian War, as well as oil price hikes in the south, ‘The Daily’ (dailyuw.com) reports that forex is one of the few assets that remain stable due to its highly-liquid nature. This makes it relatively low-risk to trade and a good judge against inflation.
In trading forex, it’s important to employ well thought out and highly strategized decisions — anything otherwise is considered risky. But thankfully, technology in 2022 has also made it easier to access software that can assist you in your investments. One of them is backtesting software.
What is backtesting software?
Backtesting allows you to test how a particular trading strategy would do against a specific historical data set. Once the program has completed its analysis, it will provide the trader with an idea of how a strategy would fare based on the market’s past performance, so that they can base their decisions on that. In tech startup founder Hrishabh Sanghvi’s words: “As long as a trading idea can be quantified, it can be backtested.”
In forex trading, backtesting has a lot of uses. Among the top benefits of forex backtesting listed by FXCM are the ability to have wins and losses readily identified, creating a statistical record where the strategy’s win percentage, expected periodic profit and loss are all available. This can also help you determine flaws in your trading strategy you might not have anticipated. Plus, since you can practice these strategies and test them without making any actual transactions, you can gain greater confidence when you do trade.
Factors to consider when choosing forex backtesting software
Availability of data
One of the pitfalls of backtesting include flawed or lacking data sets, which could lead to what we call postdictive errors or the deviation between its predicted and actual outcomes. This is easily avoidable with manual backtesting or forex testers. However, backtesting software can sneak in data that is available “after the fact”—a prediction not counted within the time frame that you are focusing on. As this information isn’t definite yet, it could mess with your simulations.
Some backtesting software data service allows you to download data directly from multiple brokers, which can save you a lot of time. But some will need you to search for this data from a third party and store it on your computer. The best way to assess the quality and availability of data is by referring to high-quality user reviews from experienced traders, such as blog posts from Warrior Trading and Forex Broker Report, who’ve tested the software themselves.
Ease and efficiency
Software that is highly automated and rigid can limit your testing, so you’ll want to find one that offers a lot of customization options. This makes it easy to rerun the analysis with certain variables being changed, so you can gauge the sensitivity of the strategies you’re employing.
However, you’ll also want to consider just how much flexibility you’ll need. Some programs allow you to navigate, track and analyze data more easily, while some offer far too many details to the point of becoming overwhelming. Many platforms offer demos—take advantage of them to see which platforms are the easiest to use for you.
When evaluating the efficiency and the availability of data for your options, make sure you take into account how it weighs against the cost of the software. If you’re doing it right, then you don’t have to do backtesting often, so you don’t want too expensive a tool sitting unused on your computer. The price range of a reasonable backtesting software is around $120 to $200 per month, but a couple of platforms that offer additional features sometimes exceed the range. Again, take advantage of demos to see if you need the extra feature provided.
With all of these factors in mind, prioritize the software that will suit your needs and trading goals. If you’re engaged in trading markets other than forex, then find a backtesting software that can accommodate your versatility. Otherwise, choose a tester specific to forex that will provide you with greater ease and data relevant to what you need. It goes without saying that the best way to find the best software for you is to check out user reviews from experienced traders and weigh your priorities against theirs.
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