Currency Trading For Dummies
What Is Backtesting and Creating Your Own System
VIDEO TRANSCRIPTHey Everyone. Today, we are going to talk a little bit more about the Forex. We are going to explore some Trade Set-ups today, and see what you begin to look for when you begin to make some of your own Trade Set-ups.
We are going to briefly discuss Backtesting and how to do it. Pretty much first of all, what is Backtesting? Backtesting is simply testing out a theory that you believe to be true a high percentage of the time.
It is important to understand that in Trading there are no 100 percent certainties, except that the Market is always right. You need to understand that and one you can understand that you will be able to realize that you are going to inevitably lose.
What you look for when you test potential Trade Set-ups is that you want them to be higher than 55 percent probability. You actually want them to be much higher than that. That is just a start, and the key to actually knowing what percentage you should be shooting for is to really understand your personality and actually know if you can actually handle losing 45 percent of the time. Most people will not be able to.
I advise you to actually look at Trade Set-ups that have at least a 70 percent win rate. Even if you were able to win 60 percent of the time you will be a big winner in the long run. Again, losing percentage of 40 percent will get to most people. They will be annoyed, frustrated and a lot of different things.
This is primarily due to the fact that we aren’t trained to realize that in some professions losing is necessary. Again, this goes back to my whole theory that people cannot be losers because society has taught us that losing sucks, and nobody ever remembers second place.
When we look at Backtesting our particular theory we are just testing and wanting to know whether the trade that we should have taken worked or didn’t work. That’s what we are looking for. We need at the end of the day to figure out a percentage of the time that it worked versus when it didn’t.
Now, we use this percentage, and it does one of two things for us. First of all it gives us more confidence in a Trade, or it makes us realize the trade is total crap.
Now, let’s go ahead and I am going to show you what a quick Backtesting example and how we would actually Backtest something.
What we are going to do here is I have got these 60 open. We are going to go back to a day that I traded which was a couple of days ago. Reason being today there was really not a whole lot of Set-ups in the market. I actually only took two trades and that’s you know kind of boring. Let me pause it here and get to that day.
Okay, so this is January 8th and there was quite a bit of set-ups in the Market. I remember that day. We are going to Backtest that and see what percentage of the time our Trade Set-ups worked versus when they did not. I am going to mark the Trades that I would personally take. I would have definitely tried to get a fill there and here and here. Then probably not here. Definitely try here. The reason not here is because it doesn’t fit one of my rules.
After that I am trying to check what time we are at. That would actually be it, because that is the end point at which I trade. Anything after 10:30 is lights out for me. Casino is closed at the time. Actually, this was a really good day. Yeah, it shows in my chart that I’ll pull up here in a minute. What it basically shows is that would have certainly had one winner here. This would probably count as one because I would have definitely held for a longer term target.
This is one winner, two winners, and this would have been a small loser. We will see what I took here in a minute. It looks like I have marked that it would have been at least one on there, one here, and one here. Maybe three winners. This one here that I forgot to mark. That would have been a loser. Three winners and one loser is what I actually have now looking at this chart. Because this again would have counted as one. That’s 75 percent. Again, I am terrible at math, but I am sure that is 75 percent. If it is not then don’t take my word for it.
That is how we would actually Backtest to see if they actually won or not. Let’s go now and look at the chart of what I actually did take. On this chart you will notice that I was actually going to post this chart on my poker blog. I still maintain my Poker Blog.
I took this first trade here, and I actually exited right here. I think the reason for that, I didn’t have any notes here is just because of the fact that the Market really wasn’t running very far, so I said to myself I would rather just lock in the quick profit there. I took a profit at 61 Fib Extension. Which is one of the things that I look for. That was a profit of 11 Pips. That is my minimum amount that I want to take in on any trade.
The second trade that I took here. I actually exited at the outer band which lined up with the 100 percent Fibonacci extension, and that was 15 Pip profit. At that I felt pretty confident that the Market was running to the downside really well. I was looking to maximize my profit.
Then, the next trade okay sorry about that. I was actually zooming into some other charts. The next chart I took was over here. The reason I only took an 11 Pip profit there is because we had a cluster of Fibonaccis lining up in addition to the fact that if you notice here the Market is starting to grind to the side.
The longer it grinded the more it made me a little nervous that it wasn’t going to continue downward. I just kind of had, I really got lucky there and I got filled on the edge there. After that it went up. I still took a stab at taking this trade. As you can see, as soon as it bounced off here on my Money Line I knew that it either was going to pop through, or I was done with the trade. That is basically what happened. It didn’t pop through and so I minimized my risk immediately and I only lost 2 Pips there.
All in all, that day on the 8th I had a heck of a day. I can tell you that after that day on the 9th. I still won a little bit, but I didn’t win a whole lot. Today I won 4 Pips.
It is not everyday that you make 35 Pips. It is certainly not an everyday occurrence. In this case the 35 Pips turns out to be 43750 at one contract.
That is how you make a ton of money at the Forex. That is just one contract. Again, I have only been trading this market for 3 months, but I just apply everything that I know about the ES to this Market and it has been a pretty smooth transition. I am kind of surprised because I have told this in my blog before, but I tried to trade the 6E along time ago. I just realized that I couldn’t trade it because I couldn’t even trade the ES.
When I finally learned what it took. Now, I feel as confident as ever with the 6E.
That is pretty much it for this video on Trade Set-ups, and how to kind of spot them.
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Until then I will talk to you later.