I just realized that backtesting forex is not a trivial matter at all, especially for those serious about trading.

Actually, it’s not that hard to build a trading system that looks understandable, but building one that truly makes profits in the long run… that’s a different story. The problem is, how do we know whether the system we build will really perform well? This is exactly where forex backtesting comes in to help.

Forex backtesting is the process of testing our trading system with historical price data to see how much profit the system would generate if we use it on that data. The basic idea is: if a system works well with past prices, it has a chance to work well with future prices too.

The method for backtesting forex is fairly straightforward. First, we need to define our strategy clearly—specify which currency pairs to trade, which timeframes to use, and what signals to apply. After that, we select old data to test, record the results, and see how we can improve the system.

Here’s a fun example: if we set a short-term SMA (5 days) to cross up above a long-term SMA (20 days), that becomes a buy signal. If it crosses down, that becomes a sell signal. Set a stop loss at -20%, and test it on EURUSD with 5-minute data. With conditions like these, we can find out how much profit the system would produce.

For tools, there are several options. Excel or Google Sheets both work. If you don’t want to write code, you can use IF and IFS functions to calculate the SMA. But if the data is very large, it may be slow.

TradingView is a better option. It comes with a built-in Strategy Tester. Give it a try. It also provides sample strategies—for example, the BarUpDn strategy, which buys when a green candle appears and sells when a red candle appears. Testing on EURUSD with a 1-year backtest showed a loss of -0.94%, with 45 trades and only 35.56% winning rate. This indicates the system isn’t very good, but we can still adjust the conditions.

There are many figures you need to look at from forex backtesting. Total return is total profit/loss. The volatility of returns shows whether the system is stable. The Sharpe Ratio indicates higher profits relative to risk—higher is better. Maximum Drawdown tells you, in the worst situation, how much you could lose.

However, forex backtesting also has limitations. Old data may not represent the future. That’s why Forward Trade Testing exists—to take the system and test it with real current data. Use a small amount of money or a demo account first. If it performs well, then use real money.

To sum it up: forex backtesting is a tool that helps us see how likely our trading system is to succeed. It’s not a guarantee that you’ll definitely win, but it provides enough information for you to make decisions.