Most experienced currency trading experts would tell you honestly that back testing is not really the best way of evaluating a technical strategy. However, they would say this in full knowledge that technical analysis is the most quantifiable method of figuring out which way the market is going to swing.
Therefore, you would be justified in asking why trading currency experts keep on relying on back testing if they know its limitations. While the main reason is that there is no better way to verify the effectiveness of a technical strategy, there are many other reasons as to why it remains popular. Here are some reasons for your consideration.
Reliance on Historical Currency trading Data
One of the absolute foundations of currency trading for many new age forex traders is that the FX market is repetitive in nature. The belief is that the way foreign exchange rates move can be determined on the basis of how they have moved in the past. Essentially, the majority of currency trading experts today believe that future price movements and trends have already occurred in the past.
Technical strategies depend on historical data of foreign exchange rates as well, which goes a long way in explaining why traders like it more than fundamental analysis.
Back testing also relies on the use of historical foreign exchange rate data to test how well the technical strategy performs. Therefore, its dependence on historical data of this type becomes one of its strengths for most currency trading experts of today.
Convenience of Back Testing
Back testing is also extremely convenient to implement. For instance, with a computer with good computing power, it does not take too long to back test a technical currency trading strategy.
Furthermore, all that a trading expert has to do to back test a technical strategy is input the right rules and provide the relevant historical data. The interim time can be used for something else.
Marketing Relevance of Back Testing Results
A lot of currency trading experts also sell their trading strategies to beginners. Thus, marketing becomes a major component of their trading strategy. The results of back testing a technical strategy, if positive, can play a huge role in marketing a technical strategy.
When beginners see good results of back testing, they become convinced of the relevance of the technical strategy on offer. Therefore, apart from profit potential, back testing of technical strategies also has sales and marketing related profit potential.
Ease of Understanding and Implementing Results
Finally, the results of back testing tend to be very actionable in nature. Actionable means that they can be understood and implemented during actual currency trading quite easily.
At the same time, it is very easy to explain the concept and findings of back testing to another individual, which adds to the lure of the concept for teachers and trainers.
Back testing, despite its myriad faults, is effective in some ways which is why it remains popular amongst the currency trading community.
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