When you want to determine if a trading system is going to be valuable to you, you must preform back testing and demoing. This is based on the theory that if a strategy worked well for others, Forex Metatrader 4 will work well for the new user. On the other hand, if a strategy did not work well for others, it will fail to work well for the new user.

Benefits Of Doing Demo-ing and Back-testing Evaluations

1. History is known to repeat. When you do a back-test, you can spot any patterns that seem to be repeating.

2. An investor will be able to know what the primary ratios are, like max draw-down, which will allow them to know what to anticipate when utilizing a certain system.

3. Knowing how a system preforms allows an investor to have more assurance when a draw-down period hits. In other words, an investor will know when sticking to the trading rules will be in his/her best interest and when he/she should forget about using the trading system.

4. Using back-testing investors can replicate the performance statistics of a system, allowing them to accurately estimate the probability and magnitude of any possible trade profits.

Downfalls of Utilizing Demo-ing and Back testing

1. Variability of Spreads

Spreads can be narrowed as a result of liquidity conditions occurring during a specific news hour. Liquidity conditions may also vary GMT day spreads and night spreads. The bid and ask price may not give a true picture of all these spread variations.

As a result, a strategy that mandates particular max spread conditions may preform better in back-testing than it will in live trading.

2. GMT Difference

The server time could change due to summer and winter daylight saving hour in the UK and US. This can cause price and history feeds to vary from the specified chart timing. This can result in mismatched figures from strategies that specify trade hours.

3. Brokers’ Control

There are some brokers who will present nearly ideal trading conditions during a back-test or demo test. However, in live trading ideal conditions are not a reality. The brokers preform this manipulation in order to make more traders want to utilize their services. You can get more information on this topic through online forex forums.

4. Trade Entry Strategy

A system that utilizes market order to make entries may find that it is difficult to get the proper price requested when in live trade conditions. In truth, in live trading conditions, the marking price is constantly changing, making it very difficult to make a manual trade at a specific price. Entry prices in back tests or demo tests will vary from that of live conditions.

Conclusion

By knowing what limitations of back tests and demo test have, investors will be able to gain a better understanding of how different trading systems work and how to gain a better evaluation of a system. Even with these limitations, it is important to understand that back testing does work.

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