How To Backtest Forex Trading Strategies

[Music]
hi traders this is matt from zen and the
art of trading welcome to another video
on forex trading today i'm going to
explain the process that you must go
through in order to create your own
profitable forex trading strategies the
information I'm going to give you today
is everything you need in order to
achieve your own success in the forex
markets there are a lot of other factors
that will influence your success such as
self discipline your trading psychology
your risk management and you just
general experience the more experienced
you are as a trader the better your
performance will be like any skill based
career or profession it's gonna come
down to how much time and effort you're
willing to put in how much you're
willing to sacrifice to become a
successful trader but today's video is
going to equip you with the fundamental
knowledge you need in order to go out
and create your own strategies to
extract consistent profits out of the
markets in other words today I am going
to teach you how to fish I'm not going
to give you any fish I'm not going to
give away anything I'm not going to give
you my strategy rules I don't even know
if this strategy has a positive
expectancy the strategy I'm going to
teach you today
I haven't back tested it far enough to
know but that's not the purpose of
today's video the purpose of today's
video is to demonstrate what goes into
strategy development and show you the
process that all systematic traders
undergo in order to first conceptualize
the trading strategy then prove that it
works now there are four basic elements
that go into a strategy the first
element is the market conditions you're
gonna trade the strategy in now there is
no such thing as a strategy that suits
all market conditions you can create a
trading plan that can account for all
mark
conditions that's different every
strategy that you come up with or you
are taught by another trader is going to
have strengths and weaknesses this
particular strategy were working on its
strengths it performs best in a trending
market with strong momentum it performs
worst and its greatest weaknesses
consolidation and trend reversals so
it's important to have very clear and
objective rules for each of these
elements in your trading plan in your
trading strategy now for trending
markets the rules I use that I learned
from Stephen Hart and a lot of other
professional traders use is very simple
and it looks like this so here we have a
downtrend and an uptrend objectively
defined I objectively define a downtrend
as a market that is making lower lows
and lower highs breaking structure to
the downside so as soon as we get this
initial 1/1 being this impulsive move
down to being the pullback and three
being the another impulsive move down
the breaks this structure this previous
low of the of the pullback once this
happens I have a downtrend and so long
as that continues we have a downtrend
and the market conditions are considered
a downtrend and the reverse is true for
an uptrend so we've got a marketers
making higher lows and higher highs very
basic stuff I mean this is very
elementary as far as forex trading and
trading general goes there's nothing you
learn today is going to be very
complicated and you will be very
surprised to learn that you can make
money out of the markets with methods
that are this simple so here we have an
example of what a reversal would look
like for each trend so here we have the
markets making lower highs lower lows
and we're breaking structure to the
downside but then here we get a break
and close above this swing high once
this happens the downtrend is over until
we get a pullback and a break and close
above this new high I do not consider
this a bullish trend
but once this pattern occurs in the
markets typically there's a high
likelihood that the that price is going
to begin consolidating or it will
reverse trend so when this occurs is a
good idea to stand aside if you're
trading a strategy like the one I'm
going to teach you today then this
market condition here is is a time to be
cautious and potentially stand aside but
this will make more sense when I go down
to the actual charts all right so that's
the objective definition of a trending
market according to this strategy now
the second element of a rules-based
strategy is your entry reason you need
it's not enough to have just conditions
obviously we need a reason to enter a
trade once those conditions are met and
in this case we're going to use one of
the most simplest price action
Candlestick patterns in existence this
is a shooting star candle right here and
this is characterized by a red candle
body doesn't have to be red but in this
case in this strategy I'm going to make
it a rule the candle must be red it must
close below where it opened and the wick
to the bottom must be smaller than the
candle body and the wick to the top
needs to be 2.5 times the size of the
candle body and now the reverse is true
for our bullish entry reason which is a
hammer candle where the wick must be 2.5
times the candle body size and the wick
to the top must be smaller than the
candle body just like this
shooting star entry reason will go short
when we see this and will go long when
we see this on the next bar so the
candle must close like this we're
trading only candle closes with this
strategy
the third element that goes into
strategy development is stops and
targets now these are extremely
important and it's also like the entry
reasons it is also important that you
test multiple variations on how you go
about doing this
but for this strategy that we're going
to learn today the stops and targets
that we're going to use are very simple
we're going to use a 180 our stop below
the swing low
of our entry candle so say the ATR was
10 pips then this would be a 69 pit stop
from the entry of the next candle
reverse is true for our short entries we
would enter at the open of the next
candle with a 180 our stop say it was 10
pips we'd have a 70 pips top and our
I'll go I'll go over the targets later
in the video because they're a little
more complicated but for now that's all
you need to know it's our stop loss
placement 180 are above or below the
most recent swing low and you can find
the ATR indicator on any trading
platform if you would say this was a
real candle we would hover over that
down here in this corner we have a 13
pip stop-loss so we would have our
stop-loss 13 pips below this way I
should mention that the easiest way to
enter these positions is to use a limit
order at the closing price of the entry
candle unless price has retraced far
enough for you to use a market order
that will account for the spread so that
stops and targets and finally we have
risk per position it's it's important to
work this one out at the very end after
you've tested variations of these first
three elements of your strategy because
you want to optimize your risk per
position based on your expected max
drawdown which I'll go over at the end
of this video now your risk per position
is going to be limited by the
functionality of your broker platform
some brokers only allow you to play
standard flawed orders or mini load
orders I trade with Honda personally and
they allow me to place any position size
I want I'm allowed to trade in units so
I can trade one dollar worth of a
currency if I wanted to and so I can
trade a fixed percentage risk of my
account so every single trade I place
whether it's a 20 pip stop for 100 pip
stop I risk 1% of my account flat
percentage and not all brokers will
allow you to do that if that's how you'd
like to trade
then you'll have to seek out a broker
that allows you to do that if you want
to trade with lots or many lots then
you'll have to adjust this spreadsheet
that I'm going to show you later to
account for that but I'm not going to
show you how to do that in this video
because all of that is quite complex and
that's what you pay a mentor for but for
now those are the four major elements
that go into your trading strategy what
market conditions you're going to trade
in this includes indicator conditions
price action conditions etc time of day
everything like that your entry reasons
are double tops and bottoms and golfing
candles you know any kind of price
action candle that repeats and can be
objectively defined with clear rules
stops and targets are self-explanatory
and as I mentioned earlier you should
test variations of this you know 280 are
stops 380 are stops half ATR stops they
can do one ATR or two ATR stop from your
entry and ignore the recent swing high
or low or you can have a rule that says
that you must put your stop-loss above
the most recent swing high or low in the
in trend that's typically what most
conservative traders go for
the first step in
our strategy is to come up with a
strategy idea or thesis based on our
observations of the market so in this
case I'm trying to catch high momentum
swings in the market I want to catch
moves like this one here now in order to
do that I'm going to define a set of
rules that I believe will capture moves
like this consistently in a repeatable
manner so the first step have come up
with our thesis which is to try to
capture high momentum swings in the
market then the second step is to write
down very clear rules on what market
conditions we plan to trade meaning
trending markets or solid aiding markets
or any market condition that you need to
see in order to begin looking for your
entry reason is a valid condition now
the conditions you think of should be
designed to enhance your edge that's the
purpose of market conditions is to keep
your strategy from being employed during
situations where it is unsuited or
suboptimal for so in this particular
case we don't want to be trading the
strategy during consolidation periods so
we're going to have very clear rules on
what a trend is and for us we have a
trending market once we have a 1 2 3
move that breaks structure above or
below the 50 EMA once we have a 1 2 3
move the break structure then price must
retrace by at least 2 candles so a
practical example of that would be this
move here we have a market that makes a
load below this 50 moving average pulls
back at least 3 candles and then breaks
and closes below this low that puts us
into a bearish trend and now we can
start looking for our entry reason to go
short we're also going to have a second
entry reason which is that we have a
trending market and then price breaks
impulsively above or below the EMA and
then puts in an entry reason that
touches the EMA I'll show you a quick
example of what that looks like because
I know it's a bit confusing but here we
have a market that just broke above
structure and impulsively broke above
the EMA pulled back back below the EMA
but
get this impulsive move with a large
green candle that reclaims the EMA then
we get a pullback with a entry candle
that tests and actually touches the EMA
this is going to be our second entry
reason and our first entry reason is
going to look like this we've got a
market the price encloses above a recent
high then pulls back and then does it
again racing but closes above this high
pulls back two candles and then we get
our entry reason here I have my candle
and the same will be true for shorts
we've got a low here that gets broke
gets taken out by this move down here we
get a more than a two candle pullback
and then we get another breaking close
below this low and then we get our entry
reason so that's entry reason number one
for long and short and then entry reason
number two is an EMA test so we're
looking for the price does not have to
break structure in this move so you can
see here we had a move up to here and
then a pullback then a break and close
above this high and then a pullback but
then we get a second high that does not
break and close above this first high
then we get a pullback that does not
break in close below this low so we
don't have a trend reversal yet but we
do have a tough test of the EMA after an
impulsive move below it so that's going
to be our entry reason number two I know
this is a little complicated but this is
this is trading I mean this stuff is
simple but there's a lot of layers that
go into a profitable trading strategy
and you'll see this all come together
soon and it will make perfect sense then
the third step is to write down very
clear rules on what entry reasons you
plan to use in this case we're going to
be trading shooting star and hammer
candles with a rejection week that's two
and a half times the body size so what
that will look like is something like
this so we have a rejection candle that
has a wick twice the size of the buddy
two and a half size of buddy at least
and no wick to the bottom so that's a
valid shooting stock candle and right
here is an example of a valid had my
candle
we are allowed a small wick on top it
just so happens these two candles don't
but if we have a little bit of a week
like that on there that's fine it's up
to you to define your rules for that but
I like to just go by the candle body
when in doubt just can't measure the
buddy we got one-and-a-half pip buddy a
to pip wick to the bottom which would
not make this a valid shooting star
candle the fourth step is to write down
very clear rules on what indicators and
settings you plan to use on those
indicators so in this case we're going
to be using the ATR indicator with a
default setting of 14 period and we're
going to be using the exponential moving
average or EMA 50 period EMA now I'm
using custom indicators that I created
myself to help me trade my own
strategies so if you want to get a hold
of these I'll leave a link in the
description you won't be able to get
ahold of this indicator here
that's detecting the shooting star
candles just yet because I haven't
released that publicly yet I'm not sure
if I will or not because it is quite
valuable I use it every day to trade
profitably and I don't want to be giving
away that for free necessarily but you
don't need this to trade you can spot
these patterns yourself visually but
that is one advantage one major
advantage of having very clear and
objective rules for defining your entry
reasons and conditions is that you can
one automate your strategy if you know
how to or to create or pay someone to
create you a script like this that
detects your entry reasons for you and
once you have this 50% of your trading
process is automated and the fifth step
in this process is to write down very
clear rules on what your stops and
targets will be so in this case we're
going to have a one ATR stop above or
below the recent swing high or low in
the pullback we're going to move our
stop loss to break-even after a one R or
180 our move from our entry and we're
going to exit our position after a
higher high or higher close candle or
lower low lower close candle in the case
of Long's
so we if we get one of these candle
patterns in the opposite direction to
our trade we're going to exit
position so if I turn these two
indicators on here this exit indicator
will identify any hi hi hi close candles
below is 50 EMA and as you can see if we
were to enter on this trade here with a
180 our top 33 pips we would have caught
a 107 pip move out of this market and
according to this example here I believe
we have satisfied the goal of trying to
capture high momentum swings in the
market now all that's left to do is to
back test this strategy over at least
100 trades I'm not going to test that
many trades in this example because I'd
it'll bore us both to sleep but you need
to take the time to test this yourself
I'm just give showing you the ropes and
giving you the building blocks before
this process you're gonna have to do
your own homework and I encourage you to
come up with your own exit reasons and
your own entry reasons this is just a
model for you to follow in your own
trading process of developing strategies
and and and testing strategies you learn
from other people there's a lot of
strategies on the internet you can find
rules for all kinds of strategies that
are profitable on the internet but you
won't know if they're profitable until
you test them so that's what this
process will teach you and let's get on
with it
all right so I have a spreadsheet here
that I have created again I'm not sure
if I'll give this away for free took me
a hell of a long time to create this
like we're talking weeks months of
modifying and editing formulas to get
this how I like it
but I will link to a rudimentary
template for the equivalent this has a
lot of extra statistics that it
calculates for you you don't need to
know a lot of this stuff but I'm gonna
use this spreadsheet for this example
just because it just gives you a more
comprehensive example of what it should
look like when you do this process
yourself properly so let's start filling
this bad boy out with actual trades the
first thing I'm gonna do is I'm going to
I'm only gonna test from January until
now so the past seven months of training
that should give us a good idea of
whether or not this strategy is worth
investing more time in testing so we're
going to be testing from this line
onwards you can use trading views replay
feature for this it's a great tool you
can slow it down just a touch
and you can let it play out bar by bar
that's the ideal way to back tests
especially when you first start back
testing this is how it should do it
should be as objective as possible don't
cheat don't look ahead because that will
spoil that that defeats the whole
purpose of doing this this process we're
doing is intended to prove or disprove
that the strategy works you don't want
to be throwing your money into a system
that's not profitable you believe me you
just it's a waste of your time and your
money obviously so don't cheat this
process take it as seriously as you can
and treat it with respect it is boring
it is difficult it is monotonous it
sucks it's not the worst thing in the
world but it's not that's not fantastic
it's not fun it is work but this is the
work we have to do to to become
consistently profitable systematic
traders but today I'm not going to use
this feature because it just takes a
long time and I'm gonna instead use my
arrow keys to cycle through the charts a
bit quicker
let's get started now we've got a ma
we've got our conditions met here
already we've got a market that's making
lower highs and lower lows below the 50
ma so now we just gotta wait and see if
we get an entry reason and we tired so
I'll just keep continuing panning this
chart to the right until we get an entry
reason that meets our rules and this
indicator will obviously detect it for
me so I can do this quite quickly and
there's one right there
valid price has broken and closed below
this low and then we've got more than a
two-count a pullback and a swing high
pin bar shooting style candle so we
would go short on the close of this
candle without stop-loss 180 are above
this high we would wait for a 180 I'll
move in our favor
which we get here and then we'd exit on
a higher high high close so this trade
would have been barely profitable we got
17 pips out of a 56 Kip stop-loss not
ideal but that'll happen with this
strategy so now we mark this with a
vertical line it's important to take in
the time time into consideration when
you're testing obviously you can see
down here this was at 2 a.m. and I
wouldn't have been awake to take this
trade so normally when I'm back testing
I would ignore this and I just move on
to the next setup but for this video I'm
gonna take every trade that I see just
just to give you a comprehensive idea of
how this process works but normally you
want to use your discretion based on
when you would be awake or work or at
school or whatever you do you want to
take that into consideration when you're
back testing you wanted back tests as if
you were trading this with real money
and you want to have realistic
expectations of it so now I'll go up to
the spreadsheet we'll select our market
euro Z and trees on the one-hour time
frame and we're trading pullbacks
simple pullback strategy the date was
16th of January and the time was 2 a.m.
the stop-loss if I hope
mouse over here and look up here was
55.9 I like to just round the numbers
when I'm back to see it makes a lot
easier so we'll go with 656 pips 56 and
our first target was a measly 17 pips
but there we go we've started we've
started our spreadsheet now I can copy
this down because we're going to be
repeating this on this market on this
time frame and the strategy but this
will make sense later why we had why we
keep this information in the spreadsheet
because later on you'll want to test
multiple strategies multiple currency
pairs or markets and potentially
multiple time frames and multiple
strategies and then when you have all
that information all that data you'll
want to merge it all into one
spreadsheet and then optimize it to find
the best reward versus your maximum
drawdown but that's quite advanced stuff
I'm not going to go into that in these
videos because it's just a lot of work
to go into that's why you pay a mentor
to teach you this stuff if you want to
learn this stuff for real in great
detail then again I encourage you to
check out my trading mentor Steven
Hart's webpage the trading channel net
he has very affordable courses on that
way you'll learn all of this stuff in
these videos I'm just trying to
demonstrate to particularly to new
traders what it takes and what it looks
like to be consistently profitable in
forex but I'm not going to show you
every detail because we'll be here for
days anyway moving on I'll do one more
of this this way and then I'm gonna move
this spreadsheet on to my second screen
and I'll still go through this process
with you but it'll make it a lot quicker
because I can type in the data without
switching screens like this but let's
find one more entry there's one net
that's valid so we'll put the line there
17th of January 10th in 1920 138
stop-loss that was hit so we type in
negative 38 there we've got our first
losing trade one winner one loser all
right let's move
I'll do one more of this and then I'll
move this spreadsheet over and I'll show
you the results at the end
[Music]
now watching down here waiting for an
entry reason there's one right there
valid entry reason first of February at
2100 and we had a forty forty two pit
stop that was stopped out all right now
I'll move this over to my second screen
and we'll get on with this a bit quicker
[Music]
and this is it guys I mean this a nice
pen I've spent many weekends doing this
do we have a valid signal eighty of
February 1400 2 p.m. a 28 pips topless
that was it
so three losing trades in a row not
unusual for strategy for losing trades
in a row still not unusual for just
strategy we'll see
can this strategy recover from this
drawdown III pip stop that was hit so
now we're in a 4% drawdown
[Music]
meaning waiting and there's another
valid entry let's see if this one loses
as well in 26th of February 1 p.m. a 41
pip stop-loss I'm gonna count that as
hit because of spread it's highly likely
that you've stopped out by this I'm
gonna count that as a loss so now we're
5 trades down 5% Road all right now
we've got a market that is broken closed
above this high waiting for pin bar
Kendall and there's one right there now
this is quite large you have to use your
own discretion on whether or not get
into this but food consists consistency
and simplicity I'm going to include this
as a ballot rate so we've got trade
that's 28th of February 11 a.m. with
quite a large stop-loss 76 pips let's
see what happened that looks like yeah
but of hit targets would have won and
there's a lower low lower closed exit
reason you can see up here with this X
above it so we would have entered for
the close of this candle and exited up
here at the close of this candle that's
a 99 pip win moving on
nothing yet
[Music]
conditions are met nothing yet
conditions that began
[Music]
there we go we've got a breaking close
above this high above the EMA and a nice
big pin bar hammer Campbell enter on the
next bar 20th of March it
thirty-four pitstop
that was hit stop losses at breakeven
we're waiting for a lower low lower
closed candle and this Annika I'm just
just one last time there we go you can
see we got a level low close exit threes
in there so measure out how much money
we would have made on that trade for
around 59 pips so now we're in the 2%
drawdown so let's continue on see what
happens
another valid entry reason enter on the
next bar 25th of March midday you had a
36 pit stop that was hit stopped also
break even
waiting for that hi hi hi closed candle
and there it is so quite a nice win
there it's a 84 pit winner moving on
right right there
[Music]
and there's another valid trade we've
got an impulsive move below the EMA that
breaks structure enter on the next
candle third of April at 8 p.m. the 36
pips topless
now again like before when we've stopped
out because this came within a pip of
our target I would have moved my stop to
break-even because there's nothing worse
than a trade getting that close to your
target and then rolling over and
stopping you out it's important to have
rules around when you can and can't do
this I didn't include this in the
strategy rules earlier but these are
things you'll pick up over time with
experience but will say that if price
gets within one pip of our target we can
move our stop to break even and you can
see here the price gap within half a pip
of our target so write that up as a
break-even trade moving on another valid
entry breaking close above this high and
impulsive move above the EMA and then a
hammer candle that actually touches the
EMA so this could be a good example of
entry number two because we didn't break
the close above this high into trend
continuation up did test EMA so 10th of
April 7 a.m. 25 pips top and this would
have been a break-even trade because
price hit our one move we would have
rolled our stuff to break even and then
this next count look us out without
giving us an exit reason so that's two
breakeven trades in a row no big deal
we're at about drawdown by the way we're
now up up 0.6% so we've recovered that
5% drawdown and keep on going
not sure whether the script didn't pick
up that but that should be a valid entry
there I have to look into that
this is invalid because this high is not
the high of this move sometimes the
indicator will pick up false positives
like that I'm still working on
optimizing its accuracy so you don't
rely on on these indicators entirely you
still must use your own discretion in
your own patent recognition to verify
that these trades are valid
here's another valid entry 25th of 4th
8:00 a.m. 32 pip stop bus that was hit
so losing trade they're moving on 12
trades in I'm a break-even that's not
unusual for strategy just so you know
this is what you should expect
throughout this process
that's why we need a lot more trades
before we can decide whether or not this
strategy works and you can see here this
this can't this is a valid trade because
we've got because we've got a market
that is trending from down here you've
got several one two three moves up in
here it is a bit messy but price has
moved and consolidated up in this range
so I would have entered this trade here
according to the rules of the strategy
and it would have been a winner so we'll
put in our little time marker down here
night of May at 20 140 pips topless and
we're waiting for a lower low localize
there it is I would have been stopped
out for breakeven
all right that's always unfortunate but
it happens
[Music]
there's another ballot rate 29th of May
at 7 p.m. with a 23 pit stop loss that
would have been hit and then stopped out
for breakeven yet again it's our fault
to break here and trade not ideal but
again I haven't optimized the strategy
this is just an injustice process now
I'm not going to enter this one because
it's just way too big relative to the
rest of price action and this is a bit
too messy for me
[Music]
now this trade here is not valid because
we are in the middle of sort of nowhere
really we haven't broken closed above
this high so we're in consolidation and
we haven't impulsively broken up and
through the EMA we have bounced off it
but this is not a valid entry according
to our rules another false positive by
the script but that's okay
[Music]
this would have been valid because we do
have a breaking close above this high
and we have impulsive breakout above the
EMA so we'd enter on this next candle
22nd of June at 2:00 a.m. with a 37 pit
stop loss and now we're waiting for a
lower low low close there it is so 18
pips on that trade
[Music]
here's an color trade third of July
midday 33 pit stop loss stop us to break
even once price hits this spot here and
now we're waiting for a higher high high
close nice move here there's a higher
high higher close candle so we're
looking at a hundred and seven hundred
and six pips 107 pips say 106 all right
moving on and here we have another
example of entry reason number two we
have we are in consolidation but we're
making higher lows and price is just
impulsively broken up above this EMA
hasn't taken out structure but this
counts as a pulse if break above the EMA
and then a entry reason that touches the
EMA counts as a valid entry for this
strategy
we're catching high momentum swings as
well as bounces off the EMA 7:00 a.m. we
would have had a 20 pip stop loss and
stop-loss is now to break even and we're
waiting on a lower load lower closed
candle well Jesus was a good move
haven't got a lower load lower closed
candle yet still in the trade still in
the trade oh there we go there's a lower
lower lower closed so nice winner here
this was this is what we're trying to
catch out of the strategy you know if I
catch these moves very often that's
another 170 a hundred six pin move and
that's the end of price data for this
year and this setup here is not valid
because it's not it's not the swing low
you can see this low is higher than
these lows so this is invalid and that's
the end of the back testing process for
this particular example so now let's
take a look at the results alright here
we are on the final results it took 17
trades which is not nearly enough to
gauge whether or not this strategy is
profitable but it is a great start and
you can see that this strategy was
profitable in the end these last two
trades made up for a lot of the drawdown
but this is a good example of what that
would look like over a typical period of
trading for a strategy now this this
particular strategy is not the best it's
nowhere near as good as a strategy that
I personally trade but as I said at the
start of the video I'm not going to give
away my best ideas for free and this is
just to demonstrate what it will look
like for you to go through this process
and the one last thing to mention other
than the fact that you should repeat
this process on multiple currency pairs
and then come up with a portfolio of
pairs and perform the best and then top
merge your spreadsheets together which
is I'm not going to go over how to do
that in this video if you do that
that'll give you a great idea of how
your portfolio
would perform and how to optimize your
portfolio you can swap pairs in and out
until you are really comfortable with
your total gain and your max drawdown
but one other thing you can do here is
if you are super aggressive and a 5%
drawdowns nothing to you and you're
comfortable with a 10 or 20 percent
drawdown depending on the results you
get you can you can increase your risk
per position and dramatically increase
your total gain obviously this is
increases your max drawdown as well but
if you have a positive expectancy in you
or you want to make a lot of money
quickly this is ace this is the least
reckless way to do it increase your
position size don't trade differently
just adjust your position size if I
increase my position size by double we
get nearly over double the game but also
double the drawdown so keep that in mind
but you can you can find the optimal
number by a tweak enos you can find the
optimal combination and go as high as 3%
I wouldn't recommend it but you know
depending on your strategy and go as
high as you like but I would caution
against going any higher than 3 because
once you get into the double-digit
drawdown range
things start to get a bit dangerous but
you get the point
what else is there to mention nothing
really other than when you're doing this
the whole point point of strategy
development is to maximize this average
average risk reward you should calculate
this on your percentage basis not your
pips basis because if you're trading a
fixed percentage of your account then
pips shouldn't matter to your to your
profits your winners need to make up for
your losses and that's it how you do
that's up to you you just tweak your
risk your position and your strategy
rules until you come up with a total
gain and a max drawdown that you like
and then that's it there's no Holy Grail
and trading you know good enough is good
enough once you cut something that's
good enough you start trading it on a
demo account ideally to start with just
to prove to yourself that you can trade
it and that you can actually be at the
charts
when you think you'll be able to and all
of that and you'll be able to execute
the trades like you think you'll be able
to for example if you're gonna trade the
five-minute chart it's believe me it's a
lot easier to back test a five-minute
chart than to actually place trades on a
live market you have to be very quick
and you gotta take things like that into
consideration
likewise for 4-hour or daily training
some of those trades can take weeks if
not months to play out so you need to
ask yourself if you have the patience
for that for me personally I like to
trade the one-hour time frame that's
because I don't have any other job and I
trade full time so I have the time to
watch the chart that long and I have a
lot of indicators I've created to help
me but you get the idea if you need to
base your strategy around your lifestyle
not the other way around one other thing
that is worth investigating is how the
strategy performs on a day-by-day basis
I've noticed that some of my strategies
perform horribly on certain days on for
one of my strategies it has above a 50%
win rate on every day except for Mondays
which it has a 25% win rate for so I
don't trade that strategy on Mondays
obviously and it's definitely helped
improve my trading results so keep that
in mind with that's why I have four day
column alright traders that's gonna wrap
up this video it was quite a long one if
you made it to the end and
congratulations you have what it takes
to be a consistently profitable trader
because to have the patience to sit
through something this monotonous it
requires a lot of self-discipline and a
passion for trading so you're well on
your way to success just a few final
notes this is just a very rough guide on
the core basic process of strategy
development and back testing there's
still a lot more that goes into this
that you'll pick up over time through
experience and especially if you have a
trading mentor which I highly recommend
you find one if you don't a trading
mentor wanted to help you shortcut the
hard lessons of trading but what they
can do is teach you methods that they've
found effective and then it just helps
you cut down your experimentation time
basically you still have to go through
the
accessing process to prove that the
strategy works and that you can trade it
during your time zone and all of that
sort of thing and and so that you can
optimize your risk per position but a
mentor can just help you cut down on
your time spent back testing methods
that don't work the other thing a
training mentor can do is show you what
it takes to endure draw downs in real
life real live trading watching a
professional trader go through you know
a month or so of not making any money
and then come out the other end
profitably is motivational inspirational
in your own trading it proves to you
that it's possible and that you'll be
okay every time you encounter a losing
streak or something you keep your cool
and you'll stay focused and that's the
main advantage of having a trading
mentor obviously I have to recommend my
personal trading mentor Stephen Hart I'm
a being a member of his EAP training
program since the start of my trading
career I'm a lifetime student of the EAP
program so I'll be mentioning him a lot
in my content because he's personally
helped me a lot in my own training he
showed me the ropes and I owe him a
great deal of gratitude for initiating
me into the trading world this is what
you'll see if you sign up to his EAP
membership you learn the basics of
trading and the markets and how to read
price action and then you'll learn a
very basic strategy very similar to what
the one I taught you today but much more
effective much more profitable he'll
show you how to back test it properly
with a and how to optimize your
portfolio and create a risk management
trading plan and then once you have all
that under your belt you can move on to
more advanced topics such as structured
trading multiple target taking
counter-trend training double tops and
bottoms advanced patterns even Tier one
trading I have also have a great trading
mentorship platform and education
platform I know that their students are
encouraged to learn advanced patterns
first because they are very objective
and rules based in nature it's very
clear whether or not you have a trading
signal to meet your rules but advanced
patterns are called advanced patterns
for a reason they quite complex
since I haven't really paid too much
attention to them yet just because I
prefer to trade pullbacks that seems to
be my strength at the moment and what I
gravitate towards naturally and feel
most comfortable trading at this stage
of my trading career the other thing he
does like I mentioned earlier is he
reviews every single trade he takes and
reviews his equity curve similar to what
I do on my blog where I analyzed my
equity curve in my trading stats for
each month and I just demonstrate what
it's like for a developing trader and a
consistently profitable trader to go
through that process now obviously my
trading stats nowhere near as impressive
as Stephens or someone from say tier 1
something like that but I am profitable
for the I'm in a bit of a drawdown at
the moment but I am profitable for the
year and we're seven months in so I only
have about 12 13 months of consistent
profitable months under my belt so I'm
still a white belt in terms of my
trading reputation in my trading career
but this stuff is working for me and I'm
excited to share it with other traders
who are going down a similar journey and
path as me there's not a lot of this
content out there that just shows the
raw reality of trading and that's why I
started this channel and why I started
my blog I just want to give people an
insight into what trading really looks
like just one last note before I let you
go 17 trades is not nearly enough trades
to get a fair reading on whether or not
this strategy has an edge this could
have just been luck yeah
so again I'm just showing you the
process of how to do this what you would
do is go way further back in time I go
back to at least 2015 but it's the
further back you can go the better back
test the rules you write down across as
many trades as possible to give you an
example of what a full spreadsheet might
look like here's one of my earlier
spreadsheets where I was back testing
and pullback strategy I like to shoot
for close to a thousand trades total
tested setups and I try to test at least
four for currency pairs and try to find
a combination that works well out of
those you can see up here
according to this test result from 2015
up until now the strategy would have
returned quite quite a nice return I
mean these are obviously not accurate
understand because with a large sample
size like this it's going to be affected
by Commission's it's going to be
affected by slippage it's going to be
affected by missed trades and trading
mistakes and errors that sort of thing
you've got a you've got to account for
that when you're developing strategies
but I mean this these numbers gave me a
lot of confidence to begin trading the
strategy I've been trading my strategy
since the beginning of last year and I
struggled at first with discipline
issues but once I overcame those issues
and began trading the strategy as I
tested it properly I began to see
profitable months I've had one two three
four five profitable months in a row
this year so even though they're not
huge profits that's consistent profits
and I'm happy with that and that's
purely a result of this process I've
shown you today so good luck with that I
hope that you'll pick this up and take
it and run with it and if you need help
with it reach out to Stephen Hart or
Tier one trading or there's other
trading mentors out there too but those
those two organizations or people Akhil
Stokes Jason Graystone and Stephen Hart
are the three forex traders that I've
come across in my learning journey that
have really really helped me get a grasp
on this industry and this career in this
profession trading is an art and it's an
art and a science and today I just
showed you the science side of it now
it's up to you to apply the artistic
side by taking these tools and applying
them to your own canvas so good luck
with that
and let me know how you go and if you
found this video helpful or if there's
anything that I missed or you feel that
I should have mentioned or you want more
clarification on just leave a comment
and I'll get back to you as soon as I
can
and thank you for watching and good bye
[Music]