Tutorial [Forex Trading] How to backtest a trading strategy

Hey everyone, this is Steven and today i amgoing to show you how to backtest and create a trading strategy.

The first thing your going to need in orderto do this is some kind of charting package for todays example we are going to be usingtradingview.

com.

The second thing you will need is a spreadsheetof some kind.

I downloaded libre office for this.

Libre office is an absolutely free applicationthat you can use and it works very similar to excel.

The next step is going to be to figure outwhat kind of trading strategy we are going to use.

For today i am just going to use a very simpledouble top , double bottom trading strategy.

So now that we know what kind of strategywe are going to be testing, i am going to go over to our spreadsheet and go ahead andtype in a title for this specific strategy.

This is going to be our double top doublebottom strategy, and i always bold my spreadsheet title.

The next bit of information we may liketo know while testing this is going to be what pair were trading it on.

We definantly want to know the date of thetrade that we take.

We may want to know the time.

We probably want to know the stop loss, theprofit target and the amount of pips that we made or lost on the trade.

Now if you are using stocks then were pairis would just be the ticker symbol and were pips is would be were cash amount that youwon or lost.

Now that we have this set up our next stepis to set up some rules for our strategy and this is a very important part.

You want to make sure that you have very specificrules in your strategy.

So you know exactly when to take the tradeevery single time you see it on the chart.

That is the only way you are going to be consistentin what you trade because if you dont have rules for say, a double top then is this adouble top and if it is then is this or is this.

They all look very similar.

They all look like double tops but unlessyou have a specific set of rules you may take this one one time this one one time and thenskip this one because you lost these two.

You may take this one and this one and skipthis one because you lost these two.

You may win these two and then take this oneeven though it doesnt look quite as good because you have won the last two and lose this one.

So its very important to have a specific setof rules that you can follow every single time you trade your double top or double bottom.

That applies for any type of trading strategyyou create weather it be fibinochi based pattern based simple price action patterns anything, structure based patterns.

Whatever you choose to create you need specificrules.

Now for your convenience and to save everbodya little bit of time i have already written out rules for the double top, double bottomstrategy we are going to test today and they go as follows.

Rule number one for my double tops is thaton the retest, this would be the retest, the second move of the double top.

Let me zoom in here so you can see a littlebetter.

On the retest, the second move the wick musttouch the top of the previous body of the previous candle, so this would be the topof the body, let me move the wick out of the way, so this wick must at least touch thetop of this body.

Just to give you an example of what that mightlook like.

Theres the wick coming in and it definantlygets above the top of the body of the candle.

Now if we had a close like this, with my rulesthis would not be and we could even bring this wick back, this would not be a doubletop, because the wick of this candle did not touch the body of this candle, nothing did, so atleast the wick or the body has to pass the top of the body of the previous candle.

Nowour second rule of the double top is the body of the retest.

The body of this candle the top of the bodycannot go above the wick of the previous structure.

Here is the wick of the previous structure.

An example of this would be if the candlecame up and closed up here above the wick of the previous structure.

This is not a double top considering my rules.

Thisto me means trend continuation which would tell me that the market intends to go higherwhich gives me absolutely no reason to want to sell this market.

So i hope those rules make sense.

They are the same for a double bottom.

I have went ahead and drawn one out, justthe opposite, instead of the highest high of the body now your looking at the wick hasto touch the lowest low of the body.

The lowest body of the candle this wick musttouch and the body of the retest here cannot close below the wick of the initial test.

So this would be an example of that.

That is not a double bottom in considerationof my rules.

So now i have a specific set of rules thati can follow, that will tell me when a double bottom and when a double top exist based onthe rules i have created.

This gives me something i can test.

The next step is to figure out how we aregoing to enter the market if these specific rules are met, so all of our rules have beenmet here, now we have to figure out how are we going to enter this market, are we goingto enter on the close of this candle, are we going to wait for a small retracement, are we going to do the most common thing and weight for a break of this neckline, weightfor a break of the neckline and then a retest, thats completely up to you, but for todaysexample what we are going to do is wait for a break of the neckline because that seemsto be the most common way to trade double tops and double bottoms, so we will wait fora break of this neckline and what we are really expecting is a breakout to the downside afterthe break of this structure level right here, so if we are expecting a breakout to the downsidewhat i want to do is put my orders about 3 pips below the neckline, so we are on 1140so lets go down to 1137 and thats were we want our orders to be resting, so that whenthe market comes down and breaks below this neckline we get sold into the market, andthe way you would place this kind of order , to keep from going into huge details aboutwhat a sell stop order is, is a sell stop order not a sell limit order.

The sell stop order would sell you into thebreakout, and since that is what we are expecting, thats were we want our orders to rest.

Now after creating an entry technique.

We need stops and targets.

Today we are going to do something very simpleand just do a 10 pip stop loss above the highest high of the double top, so what that wouldlook like would be, here is our entry and our highest high is 2024s, so what we aregoing to look for is 2012s , thats our 10 pips and that is our stop loss.

On these kind of structure based strategiesi always like to make sure i get atleast a 1 to 1 risk reward and the easiest way todo that is to take and copy your risk, color it green and so now we have targets and astop.

We have a 1 to1 risk reward we have rulesand an entry technique.

We know exactly how we are going to tradethis every single time it happens in the market.

This is all we need to start backtesting thisspecific strategy.

So without further ado we will go down tothe charts and actually test this specific strategy.

Oh and one more thing about stops and targetsis you can take stops higher, you can do a 20 pip above the highest high of the doubletop or you can do an atr based stop, i have an atr down here, atr would be 22 above thehighest high um you could do a fibanachi extension or inversion for stop losses just to giveyou a few ideas of how you could do this.

For targets you could take targets at a fibanachiretracement of 786 or previous structure right here and that doesnt give you a really goodrisk to reward but im just giving you more examples of how you could possibly trade thiswhen it comes to stops and targets.

Alright and now back to the charts to findsome of these examples.

Okay right here i already see something thatmeets our rules for a double top.

You have got a test, a retracement a retestand the body of these candle does not close above the wick of these previous candles, so that tells me that this is a valid double top and a valid trading opportunity consideringthe rules we created for this strategy 3 pips below the neckline is were we want our orders703s we are going to go 700 there is our order, our stops are going to be 10 pips above thehighest high of the double top 78s we are going 88s copy and paste this and as you cansee we were stopped out of this trade but thats okay we are recording information.

Take our ruler measure it out, looks likewe lost 87 pips on this specific trade.

The trade took place on 11/11/2015 so thepair is going to be the EURUSD the date is 11/11/15 the time, the stop loss was , wehave a one to one so we know the stop loss was going to be 87 well -87 we know our profittarget was 87 we know we lost 87 pips on the trade, so now we have got our first traderecorded, and pretty much guys you just go through and do this over and over and illgive you an example of a few more trades and at the end i may give you a couple of otherexamples of trading strategies you could start to test and try out , uh right here we haveanother situation that meets our rules, test, retest and a break of the neckline.

3pips under is were our entry is sitting 24s21s stops and targets, stops 10 pips above the highest high right here 10 pips above89s would be 99s and as you can see again we were stopped out of this trade.

Thats okay we almost made it this time, abouthalf way to targets.

Looks like about a 60 or 70 pip yep 77 pipson the loss, this trade was on 11/09 so we come in 11/9 loss of 77, 77 was our targetand we actually lost 77 pips, the time on this trade was 5:00 o”clock and ill just doa couple more so that you can just get a better understanding of exactly how to go throughtthe charts and do this.

Another example right here that meets ourrules.

Test, retracement, retest.

The retest meets all of our rules, so we willput a entry 3 pips below the neckline, place our stops above here 10 pips, targets and use our ruling tool, ruler tool excuse me, this trade was a win of 58 pips, backover to our spread sheet, stop loss we know was -58 target we know was 58 pips, we knowwe made 58 pips.

Date and time, date was 11/05 at 6:00 o”clock, 11/5 6:00 o”clock and ill say just 1 more trade, lets see if we can find one more placethat meets our rules here.

Here is a big one, so we have a starting point, an initial high, retracement retest and lets see if this retest meets our rules.

The retest highest high did make it to thetop of the bodies of the previous closes, if i zoom in a little bit you can really tellthat this wick did make it to the top of these bodies so that counts, that is meeting ourrules, so now we come below the neck line 3 pips 86 down to 83 and place stops and targets, stops 10 pips above the highest high right here 37s lets go a 1 to 1 and we have a bigwinner, ruler, right at 100 pips on 11/2 at 1400.

11/2 1400 it was -100 on our stop loss 100pips on our profit target and we made 100 pips, so as you can see 4 trades in and weare about 50 50 and nearly break even on this strategy.

Now guys this is not a trading strategy thati suggest you use, this is all for educational purposes.

I am just trying to show you how you wouldtest a specific set of rules in a strategy and put them into a spreadsheet, uh and fornow this stop loss and profit target area does not seem to make alot of sense consideringwe are doing a 1 to 1 risk reward but for other strategies when your risk reward isnot a 1 to 1 and you have a different set of profit targets and a different set of profittargets these will really help out, these little sections here will help you, its informationthat you will want to know.

Just an example of another testable tradingstrategy would be something like this, as we can see the market is breaking into lowerlows.

We can see that it broke this previous structurelevel here and what we could do here is create some kind of trend following strategy, sowe broke below closed below this previous swing low right here and since we did that, we can say alright ill take a fibanachi retracement from swing high to swing low and i will sellthe 618 retracement every time the market breaks below structure and retraces up tothe 618 i sell with stops just above previous structure and targets as before at about a1 to 1 and this would be a testable strategy.

You could go through the markets and try outand test it with 100 trades and see what happens and you could also test different ways totake these profits, instead of having to take it at 1 to 1 you could take it down here ata previous structure level and for the entry you could be a little more aggressive withit and say the market doesnt always come up to the 618 so maybe i want to sell at the50 percent retracement or you could be a little more conservative and say well i get a waybetter risk reward if i sell at the 786 right here, so there is unlimited ways to take profits, to set stop losses and to build a trading strategy that could be profitable.

That is going to be it for today guys.

Thank you for watching if you have any questionsor comments just leave them in the comment section below the video.

If you would like to see more educationalcontent like this, if you enjoyed the video then please like and subscribe to this channel.

I will be doing a video on more advanced stopplacement and more advanced targets.

Pretty soon i will also be doing some videoson advanced patterns.

The butterfly, the bat, the gartley and thecypher pattern.

So that is all for today.

Good luck in the markets.

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