How To Backtest A Trading Strategy

Backtesting is the foundation of any successful trading strategy. It allows traders to evaluate how their strategies would have performed using historical market data. This process provides invaluable insights into a strategy’s profitability, reliability, and potential losses.

But why every trader should backtest a trading strategy? Without testing, you are just going into the markets blindly, risking capital on an unproven strategy.

In this guide, we’ll dive into the principles, tools, and step-by-step processes to backtest like a pro.

Backtesting is a way to check if a trading strategy could work by testing it on past data. It can be done manually or automatically, depending on the tools and complexity of the strategy.

• Done by looking at past charts and testing the strategy yourself.
• Great for price action strategies.

• Uses software or EAs to test strategies on past data
• Best for testing trading robot strategies

Aspect	Manual Backtesting	Automated Backtestingg
Time Needed	Takes Time	Fast
Trading Style	Price Action	Robot/EAs Trading
Backtesting Tools	Manual	Automated

Each method has its strengths depending on the strategy and tools available. In this article, we will be focusing on Manual Backtesting since that’s where my expertise lies.

A good backtest needs to be accurate, relevant, and repeatable.

It should use reliable data to reflect real market conditions. The test must match the type of market you plan to trade in so it’s relevant. Finally, the results should be repeatable, meaning the same strategy rules should always give the same outcomes, showing the strategy works well.

Before you start backtesting, you should do strategy skimming. Strategy skimming is when you go through past market data without using tools like TradingView Bar Reply by doing this you will instantly have an idea of whether the strategy has potential or is just a waste of time.

Before you even backtest you need to have a strategy and write down every single rule of your strategy. When do you buy? When do you sell? How much do you risk? Don’t leave anything vague.

Here is an example of mine:

I trade during specific London and New York session times, focusing on market structures A or B. I look for key areas like premium/discount zones, order block mitigation, liquidity sweeps, and inducement to find potential entries using three different entry types.

I manage risk with a 0.5% stop loss, trailing to break after liquidity is taken. You can get my full trading strategy using the button below.

As I already have mentioned in this guide we will be using manual backtesting, so you need to choose a backtesting software that will make your backtesting as easy as possible. I have my criteria to look for when choosing a backtesting tool for example it must use TradingView Advanced Charts

Here is what I look for in the best backtesting software:

• TradingView Chart Framework
• Trade Execution During Backtesting
• Unlimited Access to Historical Data
• Multi-Timeframe Access During Backtesting
• Advanced Backtesting Analytics
• Custom Indicators

I have done research on this topic so you can check out some of the best tools for bracketing using the button below. But my top backtesting software that we will be using in this article is FxReply.

If you’re ready to start backtesting with FxReply, the first step is to create an account.

Visit the FxReply signup page, where you can register using your email or Google account. Once your account is set up, you’ll be greeted with an easy-to-navigate dashboard.

FxReply offers multiple pricing plans, but the Intermediate Plan is ideal for those backtesting new strategies. However, if you have an existing strategy that needs fine-tuning under different market conditions, the Pro Trader Plan is a better choice.

By using the link provided, you can enjoy a 15% discount on any plan.

To start backtesting, navigate to the Trading Sessions tab. Here, you can set up:

• A Specific starting balance for your tests.
• Choose which assets or markets to backtest.
• Define the historical data period for testing.

You can name your sessions however you like. A great approach is to name them by quarters (e.g., “Backtesting Q1 2021” or “Backtesting Q2 2022”) to compare performance across similar periods in different years.

If you’re testing multiple assets, FxReply allows simultaneous testing, helping you determine if you can effectively manage trades across different markets. For deeper analysis, you can enable Advanced Session features to assign specific strategies and include spreads and commissions in your backtesting.

Once your session is set, click Start to access the FxReply chart. From here, you can fully customize the chart’s appearance and add technical indicators. Before placing a trade, use the Risk-to-Reward Tool to set your parameters, then place your trade using the button in the top-right corner.

Some of the key features available on FxReply charts include:

• Adding custom indicators.
• Placing simulated trades.
• Saving trades directly to your journal.

The built-in FxReply Journal lets you document trades in detail during backtesting. You can rate your trades, use a confidence scale from 0% to 100%, and even take screenshots of specific moments.

For additional flexibility, consider using an advanced journaling template. A Notion template is available to help you track your trades more effectively.

There is an Advanced Analytics section on FxReply that provides a clear picture of your trading performance. Some of the highlights include:

• Your overall profitability.
• Analyze your performance results by session, time of day, or even days and months.
• There is also a feature called “Revind” that visually summarizes your backtesting performance. You can even share these results via a QR code or link.

By using FxReply’s analytics tools will help you easily pinpoint areas for improvement and track your growth as a trader.

Once you’ve completed backtesting and found a trading strategy with a consistent edge, the next logical step is forward testing.

When forward testing, I don’t recommend going for demo trading because it does not have the mental stress you find in a real account. Instead of a demo use a small account or a cent account to see if the results you got from backtesting can be repeated in a real market condition

Backtesting is a crucial step in building a successful trading strategy. It helps you test your ideas using past market data to see how well they would have performed. This process allows you to spot flaws, refine your rules, and gain confidence without risking real money.

So you can look at key results like how often your trades win, how much you could profit, and how big your losses might be.