[0:15]Hello everyone and welcome back to the channel. In this week's educational video, we are going to be talking about back testing and the best way to do it efficiently to improve your long-term trading results. So, why should you back test? Now before we even get into this, I'll tell you what back testing is in case you're completely unfamiliar with the term. Back testing is basically where you use your strategy and you test your rules on past price action to see how well your results work. So, why should you back test? Well, the first reason is very simple. Most traders don't back test and most traders don't win. The best way to actually succeed is to build a set of rules and then enter tunnel vision and focus just on those rules and just on that strategy. If you do that, you can actually develop your skills so much in one specific topic, in one specific area that you're very, very confident and very, very successful in that style of trading and then you can just replicate week after week, month after month and bring in those steady profits. So, as we just mentioned, the best reasons to back test are, first of all, to build your edge by seeing your strategy in action, you can pick out the strong points and the weak points and you can then build upon the strengths and worm out the weaknesses. Align with your strategy. If you don't back test, you don't have any data telling you why you should follow your system, therefore you're more likely to break your system and take gut instinct trades which are never a good idea. So by back testing, you can align with your strategy when you head to the live markets and you'll know exactly what you need to do step by step. You need to test your strategy and you need to see the results for yourself before you start risking real money on it, otherwise you're going to lose. So, these are the main reasons why you should back test and why back testing is so important. Now, there is a simple process to back testing. There's a lot of depth that you can go into and there is so, so much to cover. So, I'm not going to be covering everything in this video, but what I'm going to do is give you a very clear way to actually get back testing and actually start improving your trading career and stepping closer to success today. So, the best way to back test, first of all, you need to build a set of rules. Now, if you've been trading a while, you probably have a few rules, you have a few ideas of the concepts you like to follow in your trading. Now, if you don't, you can obviously get some good education, build a set of rules from that and then you can actually go ahead with that set of rules and try them out in past price data. Now, you can do this using a software like TradingView, or even MetaTrader, I believe works for this, the desktop version of MetaTrader that is, where you can actually cycle back in price and then replay each candle to actually trade as if you were trading live, but back in the past price data. When you have your set of rules and you've tried them out in the past price data, you'll be able to see if your strategy is profitable long-term. If you have a long-term profitable outcome, you're all good to go to the live markets. So, the first thing you need to get back testing is a chart software. I choose to use TradingView. You do have to have a paid plan to do the bar replay. I think the cheapest one is probably about 15 pounds a month, potentially around 15 to 20 dollars. It's well worth it if you're serious about a trading career, you can't really afford to not have it, so definitely get yourself a subscription to TradingView. I will put a link in the description for that as well. And the other thing you're going to need is a place to store your data. You can use an online note tracking software, that's the best way to do it. If you don't want to use one of those, you could simply track things in a private Discord or something like that, or on a Word document.
[3:53]Essentially, you need somewhere you can put chart screenshots, a description, a deep description of the chart screenshots and the trade process and then obviously the amount you're risking, the amount you're taking profit on, things like this. So, basically, you want to track it as if you were tracking a live trade, the setup and the reasons for entry, the amount you're risking on the trade, the amount of profit you took from the trade or the amount you lost on the trade. If it was a loss, then look into it and see if there were any mistakes made, or if it is a simple loss in the game of probabilities. And if it wins, why did it win? What was good about it and what can you do next time to actually, you know, make sure you win more in your back testing results. Now, it's important to track wins and losses when you're back testing, because if you fail to do that, you'll never going to build upon the losses and work out why you're losing. I noticed in early days when some of my students sent me back testing, they don't show me the losses, they just send a bunch of wins. And then I have to put them on the right path, you know, check them up, make sure that they're actually tracking their losses as well. And when they do that, that is when the real results really start to begin. We're here on TradingView now. What we can do from the get go is first of all, choose our dates for back testing. So, if we go to this little calendar at the bottom here, we can click this, and what this does is actually bring up a go-to box. And this go-to box has calendars of years and years of price action in. Now, the first thing to think is, are you a day trader, are you a swing trader? You're probably going to want to do top down analysis, so make sure you're on the suitable time frames. And also make note that if you go too far back in past price data, you won't be able to use the low time frames like the 10 minute, five minute, three minute and one minute, okay? So, don't go too far back, perhaps go about one to two months if you are using those low time frames. If, of course, you were a swing trader and you're going, you know, lowest four hour or one hour, you can go pretty far back in the data. So, what I would like to do, and what I like to do in my back testing, is start from either the start of a month or the start of a week. Now, for this example, I'm just going to scale back to the start of a week, which is going to be Monday the 9th of August. Now, if I click go to, what that actually does is bring up a little box here which tells me where the week started. We can then use our bar replay tool using this button just up here, and then scale price back to that point, and then we can begin back testing from there. Now, the problem you may have with this is when you do this, when you scale back using this calendar tool, you'll be able to see the price data in front. Now, just an easy little trick around that, because it's not an easy one to get around, is simply to squeeze price and then if you scale back when price is squeezed like this, for example, if I go to this point, I have no idea what happened from there on and if I scale price back up, I'm not too sure what's going to happen in front of me, all right? So, that's just an easy little tip, a simple little tip to get around the fact that you can see the price data. Just make sure you squeeze price down, scale back then and when you then reopen price, you will generally, not really know what's going on before that point. So, we're going to scale back to the 9th of August for this one. So this candle signifies midnight on the 9th of August, the beginning of the day. This is where we want to begin back testing. Now, what you should actually do is make sure that you are being realistic with your back testing so that when you come to the live markets, you have the best results possible. Now, what I mean by this is most likely at midnight, you're not going to be sitting at a trading desk ready to execute trades. So, what you should actually do is make sure that you are starting from a realistic time in the day. Now, for me, I like to trade London session the most, so what I will do is go ahead and put a line on 7:00 AM. This is the time I want to be ready trading and looking for market opportunities, so this is the time that makes most sense to actually back test from. I can then see if my trades are performing well through London session, that's what I'm going to trade when I come to the live markets. Now, what I then want to do is put another line at the start of the New York session, and we could even put one at the end of the New York session as well. So, this is essentially going to be my trading day, okay? So, throughout one single trading day, we have this price action to work with. I'll actually remove this one for now just to keep it nice and neat. And then what you can go ahead and do is by the time we clock off at the 5:00 PM mark for me, which is going to be the end of New York session in the UK. You can then prep up the next day and start from there. See how your Monday results went and then see how your Tuesday results went and so on. So, if we just scale price forward, what we can actually do from this is get a good idea of what price action is up to on this Monday. Now, there's not going to be a trade every single day for you when you're trading the markets, or when you're back testing the markets. So, what you can actually do is actually just learn from some of the sessions. In this instance, I've just been learning from this session because there's not been any tradeable opportunities here for me. Now, mate, I just add real quick, this strategy that we're using here is a example strategy, it's not the way I trade, but it's just a nice easy way to show you the back testing in action. So, this Monday, as we can see, was a day that no trades would have been executed. What we did have, however, was some clear structure points which may point to some trades later in this trading week. If we look here, we had a bearish break of structure. We have then also formed in this new lower low and we've had another bearish break of structure past this. If we get a little bit more significant downside, we could look towards this supply zone area for a short trade, okay? So, as we can see, obviously, not every day is going to be a trading day, but we can prep set up. And this is similar to how you'll be trading in real life. Personally, I take maybe one to three trades a week, primarily one to two trades, and that does me for the week because I can pull 5, 6, 7, 8, 9, 10% out of a trade. If you are a higher frequency trader or you're trading lower time frames, obviously, every single session you trade is going to give you a lot of data, okay? But if we're looking just in this example at the hourly time frames, and we're just going to go with a basic trend-based hourly system, uh, we can essentially say Monday, no trades were taken, but we did see a lot to learn for future setups. So, if we go ahead and plot out the next day's price action now, once again, choosing 7:00 AM to 5:00 PM for the primary trading hours. We can then see how price moves throughout the night, throughout the Asia session, moving into London session. Now, in Asia session, we did get a nice break down in this market, so what we could go ahead and do now is scale it to the 30-minute time frame, see if we can get a nice refined a total area to look for shorts from. And then we could go ahead and place on a potential sell limit order because we know, right, we've had the trend broken and the market may now be willing to move further down. So, if we just size this trade up, shift it to the hourly for some form of target, we could look for this little zone as a target for the trade for a 5R position. And then see how this plays out throughout the next day. And after letting price play out a bit, we can see that Monday, we had no trades. Tuesday, I had no trades. Wednesday, I had no trades, but coming into Thursday session now, or potentially through the Asia session between Wednesday and Thursday, we may trigger that order that we set on day two. So, obviously when you're back testing, you don't need to be chasing trades, you need to trade how you would in real life. Uh, this obviously isn't my trading strategy, but in terms of the trade frequency, this is probably about how often I trade, okay? I never rush positions, I simply enter when the market gives me a setup, and any days I don't trade, what I'll actually be doing is making a back test page of these specific days, just showing the price action that moved and, you know, the setups for future trades. So, just because I didn't place a trade this day, this day, or this day, I would still make an entry for each of these days in my back testing journal, because I can talk about the setup that was formulating and also then see what patience brought me, the opportunities patience brought me by not rushing into positions, okay? So, it's important to back test everything, even if you're not trading, even if you are just literally journaling a few points about the market movements that day or how you felt on that specific trading session, it's really important to actually make notes of these things as well. So, moving into the Asia session between Wednesday and Thursday, then we can see that the trade that we set up on the Monday, or on the Tuesday, should I say, was actually triggered in and the market then moves down. Obviously, we have adjusted the take profit to the low of the range because we are in a down trend, and we can anticipate that this is likely going to be tapped. And as you can see then, throughout the Thursday day, this is the day of management, okay? So, this is where the trade executed at the end of Wednesday, and then Thursday would have been the day for trade management. Coming into London session here, we can see we had a small push through the upside and then a large rally down. Now, this large rally down here is where we would actually scale into the price action and look at management and how we would manage the trade throughout the day. So, as the trade's playing out, let's say you use a stop loss trailing system, where when the market makes a new low, you trail the stop loss to the previous high. So, if we just brought price back then, what we would want to do from this point is while the market is playing out live, make any notes of what we maybe feeling at the time, or things that may be interrupting with our trading processes. And then we can actually go ahead and start using this stop trailing system. So, as an example here, we can see the market broke this low and made a new lower low. At this point, we could scale our stop loss over the previous high, so that then brings our stop loss into profit. And then if the market then made a new lower low, as we can see here, we have had one of those, so this structure point broken, lower high, lower low, we could scale our stop loss again. Now, at this point, we're probably locking in around 2.5 to 3R in a losing scenario. What we can do then is continue to let the market play out. As we can see here, we are now forming a lower high and then a lower low once again. So, we can trail our stop loss to this point. Now, this way, if the market went past and surpassed our stop losses at this level, we could then count up how much profit we made on that movement, make notes of that. And that's going to show you the benefits of trailing your stop losses and help you to ingrain that into your mind as a part of your live trading routine. So, in this instance, we did go and fulfill the profit target on this position, and what we could go ahead and do now is make our back testing journal entry. Mark out the strong points and the weak points of the position. Talk about our trading process, how did we find the trade, the patience it took to wait for the trade, the stop loss placement, the target placement, the logic behind everything to do with the movement. Then we want to talk about the actual trade management. So, we want to mark out the stop loss trailing and we want to make notes of that within our journal and within our back testing entry as well, so that we can see what the benefits of trailing the stop losses were and how we can actually bring this into practice in live markets. Skip back to the start of a week or the start of a month, and put your rules down on paper and then follow those rules throughout the price action and see what trades you managed to get. Now, in this instance, we will have seen this week would have been a 6.6% winner by the end of Thursday session moving into Friday, and this would have been a sign off. So 6.6% in a week is a lovely profit and all it took was one trade. We only learn these things from back testing. If we don't back test, we don't get to see our strategy in action, we don't get to see how profitable it can be to take only one trade a week, and this actually causes people to rush into the markets and constantly try and trade every single day. If back testing shows me I can make 6.6% a week from taking one position, a very precise, calculated position. Well, now I'm much more confident and much more happy to wait for that one pinpoint setup to come around every week, okay? So, back testing is super, super important and it always will be as long as you want to be a successful trader. So, I hope you've enjoyed this video. I hope you found it very beneficial. I would recommend you now go over to the charts today. Start your first hour of back testing. I have a full back testing chapter coming out for the students of my trading Academy this month. But this is going to be an extremely in-depth breakdown of back testing and everything you could need to back test successfully and everything that I personally do that help bring me to the point of doing this as a career. Now, you can join over 150 students who have been through the trading Academy and came out the other side much better traders.
