Backtesting the forex beginner strategy

This content is provided for educational purposes only. If you decide to apply what you have learned, you do so at your own risk. Please read our disclaimer.

Last updated on 22/12/2012

The forex beginner strategy is an easy learning tool that allows you to practice trading in a simple and beginner-friendly way. We recommend that you trade on a demo account with play money, until you are experienced enough to make a conscious and risk-aware decision whether to trade for real money.

At the same time you can explore different trading concepts, other ways of analysing charts and start developing your own strategies and ways of trading.

In this lesson, we will show you the backtesting results of the forex beginner strategy for the EUR/USD currency pair since January 2001. A backtest simulates the performance of a strategy based on historical data, to estimate how a strategy would have performed if it had been used.

Things to bear in mind when looking at backtesting results.

There are key points that you must be aware of before looking into backtest results.

Past performance is not indicative of future results

The forex market environment can change, and this can significantly impact the performance of a strategy. Thus, a trading strategy that would have been very successful in the past years might not be successful going forward. Experienced forex traders are often able to judge under which overall marketing conditions a strategy can be expected to do well. Until you have gained such knowledge, be careful before relying on any one strategy.

Backtesting is not an exact science

There are different factors that influence the outcome of a backtest. For example, different forex brokers will have different spreads, and so using a variety of brokers will produce variations in the results. Another thing to bear in mind is that price feeds also vary between brokers, which means that indicators such as fractals could appear at different spots depending on the data used.

Then, there will also be difference based on whether a backtest is done algorithmically or whether it is done by a real person going over historical price data. In our case, we used an algorithmic approach to reduce the impact of human error.

Finally, there is a difference between backtesting a trading strategy and applying a strategy in a real environment. In a real environment you are more likely to make mistakes or react a bit too slowly to changes in price. Also, depending on your broker, factors such as execution speed and slippage might impact the results.

Trading large positions can yield different results

The larger an account gets, the more you can risk and hence more volume you can trade. However, trading very large amounts can actually produce a unique problems, because you can actually move the price of the asset you are trading, simply by putting on a trade.

This tends not to be an issue when trading very small sizes, however you should note that when you start to approach a large enough volume, you may actually move the price. This could potentially give you slower execution as well as less desirable prices in order for your entire order to be filled.

The backtesting method used

As the rules of the basic beginner strategy are purely mechanical, we created an algorithm that applies the strategy to real historical EUR/USD data ranging from 1st January 2001 until 30th November 2012.

The algorithm was instructed to only consider trades that happen in the EUR/USD prime time, which is from 8:00 GMT until 17:30 GMT. After 17:30 GMT, no new trades were opened. All remaining open trades were closed at 18:00 GMT.

If you would like to learn more about the best times to trade, you can go to the following lesson:

Lesson
You should trade forex when the markets are most active, because you want to trade when the markets are volatile and liquid. Learn when the best times are to trade the ...
You haven't attempted the quiz yet.
41

For the test, we assumed an average spread of 1.5 pips. The algorithm worked on the bid prices, with the spread being substracted from the end result of the trade. Note that when trading for real, one needs to take into account the spread when setting up the trades.

We also assumed a 0.4 pip distance between any candle high/low and the fractal tip.

The money management method used was not the general method given in the beginner strategy. Instead we used the advance method of determining the pip size, explained in the following lesson:

Lesson
Learn how to better manage risk and protect your trading capital by building on the money management skills introduced in the forex trading beginner strategy.
You haven't attempted the quiz yet.
52

We used our best efforts to make the backtesting as accurate as possible using the above method, but can give no guarantee that our backtest has been error free.

The above method generated 7000 trades in the time period. You can download an excel file giving the details of each trade here:

The 7000 trades in this period of time were then analysed:

Looking for a mentor?

Matthias from our Tradimo Premium team will design a learning plan tailored to you that gives you access to new courses and live webinars every month as well as priority private email support.

Order our Tradimo Premium Service now

Summary of backtesting results (after spread)

Total Number of Trades7000
Winning Trades354050.57%
Losing Trades346049.43%
Avg Win per Winning Trade (pip)13.96
Avg Loss per Losing Trade (pip)-11.61
Average risk to reward1:1.2
Avg P/L per Trade (pip)1.32
Total P/L (pip)9241
Average P/L (pip) per month66.48
Maximum drawdown (pip)399.5

The following shows a chart of an accumulation of pips over the total 7000 trades

Accumulation of pips


How does the profitability in pips translate to returns?

In order to determine how a profit in pips translates into an actual profit, the position sizes used are key. Larger position sizes mean higher risk, but also higher returns.

We have simulated the fictional returns of the beginner strategy backtest using the following simulation:

We took a fictional starting capital of 100,000 USD.

For each trade, we determined the position size based on risking 2% of the total equity on any single trade.

This means that if the stop loss was hit in any trade, exactly 2% of the capital would be lost.

To determine the amount of capital gained or lost per pip in a given trade we used the following formula:


Capital gained or lost per pip = (Max risk per trade)/(Distance entry price to initial stop loss in pip)

Where Risk per trade = Trading capital * 0.02.

As each trade affects our trading capital – it will increase, decrease or stay the same depending on the result of the trade – it is recalculated after each trade by adding the respective profit or loss.

Using this approach, and again assuming a spread of 1.5 pip, we get the following results:

YearTotal returnAverage compounded monthly returnMaximum drawdown in USD
2001160.44% 8.3% 37.33%
200231.29% 2.29% 33.75%
2003208.38% 9.84% 20.56%
2004162.73% 8.38% 41.83%
2005341.33% 13.17% 19.24%
2006163.27% 8.4% 14.95%
200761.32% 4.07% 59.26%
2008563.45% 17.08% 10.78%
2009182.4% 9.04% 35.28%
2010273.86% 11.62% 17.12%
201169.68% 4.5% 40.29%
2012 (until November)78.33% 4.94% 23.54%

If you would like to look at the charts for each year, the you can go to the following:

Article
See how tradimo's forex trading beginner strategy performed each year, from 2001 to 2012 with annual backtest charts.
14

Again, we would like to remind you that past performance of a backtest is not indicative of future results. The forex beginner strategy is a learning tool that allows you to practice trading in a simple and beginner-friendly way.

We recommend you to trade on a demo account with play money until you are experienced enough to make a conscious and risk-aware decision about whether to trade for real money. If you decide to use the beginner strategy for real money trading, you do so at your own risk.

If you would like to start enhancing your results then ou can go to the following lesson:

Lesson
Most of the time, successful trading is knowing when not to trade as opposed to when you can trade. Learn how to avoid draw down with the beginner strategy.
You haven't attempted the quiz yet.
52

Looking for a Top Broker? Sign up through Tradimo & get extra benefits!

eToro Plus500 Markets.com FXFlat

See all top brokers


  • thanks guys, can you also post a very long term backtest? Lets say 2000-today
  • Hi markus1000,

    I will inquire whether we can do this without creating too much effort that would delay the further development of other materials and get back to you.

    All the best,
    Sebastian
  • Hi There markus1000,

    We are currently working on a number of testing parameters for different strategies and working on more content. The backtesting is to show that over a significant sample size, the strategy is promising over different market cycles. We will look into providing more backtesting on the beginner strategy, for those such as yourself who are interested in the results. But we will concentrate our efforts first on other strategies and content.

    Kind regards

    Dean
  • Great article!! Has helped me to see how the beginner strategy is such a great starting point, It will be very interesting to see how the strategy becomes more dynamic as we add other concepts like trading channels etc . smile
  • Very interesting, thanks for the simulation!
  • Uhh, I have a question. Every time someone on the forum asked about this they were given an explanation as to why showing backtesting results would be counterproductive. It doesnt predict future results, it depends on the trader, don't want to get your hopes up etc. etc.. Even Dominik stepped in to try and sort out accusations of duplicity regarding backtesting results. Has the Tradimo team collectively gone through a major paradigm shift regarding this in the last few days? Why was this such a bad idea a week ago but now is a good idea?
  • Hi delete461,

    Thank you for your post and I certainly welcome the question. I am sure that there are others who asked this, because in the beginning, we were hesitant to publish the backtest due to the dangers that can come with it.

    Essentially, just posting the backtest on its own would have been dangerous and that is what we have avoided. We did not want to produce a backtest that would encourage people to start trading widely, having the past performance in the fore-front of their mind and not pay attention to the real dangers of trading based solely on such a backtest.

    However, many of our users, were persistent in that they wanted to see the results. So we decided to present the backtest in the most sensible and safest way to our community as possible.

    We have therefore written an article regarding the backtesting and as you can see, the entire first section is dedicated to the same message that we had a in the beginning – there are dangers when considering backtesting results.

    The fact is that a strategy does depend on the trader to execute it properly and backtesting does not predict future results. We have never said anything to the contrary. In fact, in this article we have re-stated those claims. You will find this under the headline "Past performance is not indicative of future results"

    The other message that we wanted to get across is that backtesting is not an exact science, there are variables that can produce different results in backtesting for the same strategy. You will find this information under the headline "Backtesting is not an exact science".

    We have also drawn attention to the drawdown period, because all strategies have a period of drawdown. If a new trader started trading based on the fact that we had simply put out raw results and in the wrong way, such as "our backtest produced this return...!" and they started to risk huge amounts and over-leverage based on this, then this would have been irresponsible.

    So, although we have given our community what they want - which we will always strive to do, at the end of the day our community is awesome so why wouldn't we? smile - the message is still the same:

    * Be careful when taking into considerations backtesting results.
    * Past performance is not indicative of future results.
    * There are variables that affect backtest to backtest, even if the exact same rules of the strategy are applied.
    * An experienced trader will know how to recognise certain market conditions and decide when not to trade a strategy - a skill that new traders will need to acquire.

    And last but not least, always, always start on a demo account first before trying any strategy out on real money.
  • Since 7000 trades were executed during this 10 year period, that means on average 700 trades were done in a year. Excluding weekends, one year would be around 260 days. Does that mean that on average, only 2.7 trades were entered per day using the beginner strategy?
  • This is correct if you only excluded weekends. There are other factors too that may affect the result that you just got, such as Christmas day smile Many brokers are not open on Christmas day and there is no trading going on.

    However, your assumptions work to get a general feel of how many trades per day you would get on average.
  • I would just add, that this is backtested only with EURUSD pair, trading other pairs along would give you much more opportunities to trade wink
  • Yup that's right. But the spread needs to be small in order to be profitable! Anyway I guess I can incorporate this strategy with the rest of the stuff I learnt here, such as using 4H time frame to confirm the market direction of the 30 min time frame, draw trend lines, avoid using this strategy when the price is ranging (bouncing up and down the support and resistance line), etc.
  • You can change the strategy to however you want for sure, just remember that you will need to test everything when you make a change. There is not point adding a bunch of trading concepts for the sake of it - they will not make the strategy better if you do not know what it is exactly you want to achieve with them.

    So for example, what exactly do you want to achieve and how will you be able to do that with trend lines?

    I'm not saying do something or not do it, but i just want you to think about what the objective is first before you add the tool.

    So for example if:

    Objective = cut down on losing trades by trading in the best markets.
    Solution = avoid ranging markets.

    Does that make sense? So essentially you think of what you want to achieve first, then add the tool, then test to see if the tool works.
  • I didn't thought of it in down to the specific details so thanks for pointing out that consciously thinking of the objective should be the first step.

    For trend lines my initial thought was that it helps to determine the direction of the market trend, for instance to see if the 30 min frame is moving in the direction of the trend or breaking away from the trend line, to use it as a further confirmation with the market direction (breaking of the up/down fractals). Does that make any sense or should it not matter?

    For 5 minutes frame, I don't think trend lines are gonna help much at all.

    What are your thoughts on this?
  • Hey yongchunpower,

    I think that you are definitely going in the right direction with this. If the question is "how do I determine the direction on the higher time frame" then that is one way of doing it.

    However, to use this in conjunction with the fractals on the higher time frame is honestly going to be too much - because the fractals use horizontal breaks and the trend lines use breaks at an angle. This means that you could in theory end up with conflicting signals.

    For example, what happens if the fractal on the 30 minute chart breaks, but you have to wait for the trend line to break as well? Then by waiting, you may actually miss the set up on the five minute chart, when the break of the fractal on the 30 minute chart would ave been perfectly OK to take as a direction signal.

    So my thoughts are, I would explore trend lines, because they are very powerful and they could work for you better as a direction signal if you are used to trading with them - but I would use one of the other.

    You can over optimise a strategy by trying to incorporate too many confirmation tools that simply end up keeping you out of the market.
  • Yup I agree with you. There are already not much 'action' in the trading market so as long as there's a strong confirmation tool I guess that's good enough.

    Looking at the backtest results and after understanding the beginner strategy, I believe this strategy works best in volatile markets where there are constant reversals in the shorter time frame. Thus it's best to find a currency pair that best fits this description. One has to be careful with the spreads though since some currency pairs have high spreads.

    That's my overall opinion. Hopefully this strategy works out for most of the beginners!
  • Is there other currency pairs that this be worth trading? Is it possible to run a backtest on other pairs?
  • Hi whipflip15,

    We are in fact doing this and we are hoping to have the results shortly. We will keep you posted with the results, we will create another article around this for you.
  • this backtest has a huge flaw imo: unless you have a big account trading 100k each time, ur commission will be around 0.5 to 1 pip on each trade, which means 1 to 2 pip on a round trip (interactive brokers takes a minimum of 2.5$ per trade) . So if the average pnl per trade is 1.3 pip and you substract the 1.5 pip of commission, the strategy is now a losing one.
    Am I wrong???
  • Hi Ched823,

    You are correct in that the spread in this strategy is a factor when considering the profitability of the strategy. But this is why we have included all the information in the article above. In fact we state very clearly that there are a number of factors that you need to take into consideration and the spread of the broker is one of them.

    This is what we mean in the above article when we say that one person doing the beginner strategy can get one set of results and another person can get another set of results, simply by these factors.

    Not only should you take the spread into account, you should also take many of the other factors outline in this article as well. I'm glad you bought up the question, because it is good for us all to be reminded from time to rime what these backtests are about. The fact is, you should not be looking at backtest results to see how much return you can get in the future - you will never know what will happen in the future and so you cannot know. However, what the beack test of a strategy does is see if the principles of the strategy are up held and under what conditions.

    So this goes into to the direction of your question - under what conditions, or what external factors can affect the strategy? And spread is obviously one of them, so when you consider trading this strategy, you should definitely take the spread into account, because as the backtest and this article shows, it is an important factor.

Register Now - It's free!

By clicking on the "Get instant access" button, you agree that you have read, understood, and accepted the Terms & Conditions.
Or