Everyone knows in the beginning of their trading journey that they need to learn whatever strategy they want to apply. Learning that strategy comes in the form of studying the basic rules of the new strategy, searching for evidence or proof in the past market, and learning how to recognize their entries in real time. After you study and learn every little piece of the strategy, you need to begin looking for ways to apply it to the markets. We achieve this through back testing.
Back testing will allow you to go from a beginner to someone who actually knows what the hell they want out of the market. Going back into the previous charts and finding entries based off your strategies helps to reinforce that strategy to you. By going back and seeing the success of the strategy over and over and over again, you are refining your ability to utilize the strategy. You begin to see “Wow….it actually works….” and thus you reinforce the power of the strategy in your head. Whatever strategy you may be using, it doesn’t matter. The point is, go back and test it over and over again, so that you learn the strategy and how to recognize it immediately. This will allow you to see whatever pattern it is you’re looking for, in real time.
The next important bonus of back testing is the ability to fix any flaw you stumble upon throughout your trading career. We are human. We make mistakes. Even after countless hours back testing your strategy, or numerous 100% accurate weeks, you will screw up some trades. It happens. When these screw ups occur, you need to search relentlessly until you find the reason the trade did not properly go through. You need to observe what you did incorrectly that caused your loss. This search for the error requires back testing. After you think you found your error, you need to go back and compare with previous trades. Ask yourself “Did this occur in these previous plays?” If there is a difference, perhaps you have found your answer, your fix to this new error. Then try running through a simulator, while applying your trading strategy and your new discovery. (This may even improve your accuracy rate.) If you continuously check the errors you encounter, you will, over time, fix any flaws in your strategy.
The final, and perhaps, the most important reason to continuously back test is to simply build confidence. How can you ever expect to take plays if you don’t trust yourself or your strategy? Pure conviction is absolutely necessary to see success in this game. The minute you second guess yourself is when you invite fear and/or greed into your head. By going back in the charts and seeing the success of your strategy over and over, you are building confidence. Confidence. Is. Key.
After seeing how you should be taking entries based off your strategy, go through a simulator to see if you can trade in real time. Obviously, it won’t be real time but that is the beauty of the simulator. It allows you to practice as if you are in real time. If you are successful in the simulator, that builds confidence as well. Then you will be ready for the live markets.
Now, even after you begin trading, this work does not stop. I spend time every day back testing and in the simulator. If I don’t see any potential plays, between the 4 Hour candles, I’ll be in the simulator working on one of my pairs. During the week, I usually spend an hour or two at a time in the simulator. After the market closes on Friday, I spend 8-10 hours straight in the simulator depending on how tired I am. Then when I wake up on Saturday morning, I spend another 6-8 hours in the simulator. I am constantly working to improve my trading. In total, every week I spend over 40+ hours just practicing. I refuse to be outworked. If you want to see success in this game, you NEED to practice. You need to back test and you need to get in a simulator.
Here is a zoomed out picture of just the first handful of practice plays on just one of my pairs.
With each practice trade you take, write up a small description detailing why you entered and how the play ended up.
If you lose, write down why. Then you can go back and learn from both your wins and your losses.
Practice makes Perfect.
This needs to be a permanent addition to your normal schedule. Professionals do not become professionals without devoting time into their craft.
1. Back Test Everything
2. Reinforce Your Strategy
3. Fix Any Flaws
4. Build confidence
5. Practice in A Simulator
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