Practice is key to success.

The power of backtesting

the rules
Description
Backtesting the rules is to trading what meditation is to your soul.

There are no short-cuts to success and becoming a profitable trader. It's a daunting task, and
you will suffer a lot. There is no magic potion you can drink that will allow you to understand
the supply and demand concept. We don't live in Harry Potter's world, and this is real life. The
practice is the mother of all sciences.

To be a master of your craft, to be legendary, to be the best there ever was in your field, to live a
life that inspires everyone around you, you've got to be willing to suffer a LOT—suffering for
your dreams, for your goals, for your craft, for your values.

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Trading the markets is not a 100 meters hurdles race with hurdles every 10 meters, but a
marathon race with hurdles every 100 meters.

You may be wondering: why should I be backtest the rules in the methodology if somebody else
has already done it for me? I don't want to do that work, it's already done for me. I want to take
advantage of that work. Wrong question!

It's pretty simple after all.

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Luck does not exist; our lives are the result of all the decisions we take (correct and
incorrect ones).

No matter how smart you think you are, your mind needs to create neuron connections,
patterns and habits. Patterns can only be created through repetition. Habits will help
you remove the fear of pulling the trigger. Only then fear and stress may be removed
from the equation.

• How long will it take me to live test the rules from September to December
in the live markets? Four months, you don't have a time machine to fast forward
time. You need to wait and be patient. The problem is that you will want to trade.
You will not be happy by spending a couple of hours a day or more and getting
no triggers.
• How many months can be tested in backtesting application with just 2 hours of
practice? About four months.
• Four months versus 2 hours? Wait wait! How can that be possible? This is the
power of backtesting.

We need an edge! No matter how good the trading methodology may seem is or how
much money we have on our live account, we need an edge. We also need a carefree
state of mind to have consistent results. Backtesting the strategy will give you that edge.
It will provide you with the belief in the system and create habits that will help you
become a successful trader.

Substantial dedication and forward testing simulation are virtually identical to real
trading. The brain simply doesn't know the difference between what is real and what is
not; our minds need to be fed with information, it doesn't care where it comes from. It
just needs food.

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Don't give up, as you go to your edges, your edges expand.

The benefits of backtesting

If you want to have the results only 5% of traders have, you must be willing to do and
think like only 5% do and think.

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Mastery and world-class is so much more about practice, discipline,
devotion, dedication, grit and relentlessness. Minor daily improvements over time lead
to consistently profitable results.
Backtesting is the process of applying a trading strategy or analytical method to
historical data to see how accurately the methodology would have predicted actual
results.

Before we start, what tools should we be using for testing? I am sure there are a few, but
Forex Tester www.forextester.com is excellent because it allows us to choose the
instrument and time we want to backtest from. Without seeing what's going to happen
next, we can pretend we are trading without any advanced warning of what will happen.
This is very powerful and flexible because we can move through many days, weeks, years
at the touch of a button without having to wait so much time.

A paper money account or a small live account will allow us to scroll back in time. You
can watch the candlesticks evolve in real-time, see the impact of news events without
knowing what will happen next. It would help become consistently profitable on a demo
account or before venturing to a live account.

Is a paper money account recommended or a small live account? A small live account
trading real money is recommended. Why? Losses have to hurt. We learn through pain.
If you lose $10, it will hurt you. Even $1 will hurt. We do not want to lose; we want to be
right every time. Use the power of pain, and your ego will kneel.

One thing will slow down your progress, and that is the mindset "I have to have this
mastered in 1 year, two years, three years". If you put a timeframe on this, you will rush,
skip ahead and not learn each element properly. Then you will have to go back to it and
relearn it because you ran it the first time. If you want to get there quicker, you must go
slow.

As traders, we need to practice a lot to train our eyes to spot different patterns and
scenarios. Did you ever think of learning to speak a second language by just reading the
dictionary or a grammar book? You won't learn to speak a language unless you immerse
yourself in the culture and people who speak that language. It would be best to listen to
many individuals talking before you start to think and talk like them. You will hear
different pronunciations and nuances of the language you are trying to learn by doing
so. Testing and trading are like this. Skipping this process will create a lot of problems
and add a few years to your learning curve.

I'm encouraging you to use a backtesting software does not mean that testing this
software can be used only to practice how to trade Forex supply and demand
imbalances. Many platforms allow you to backtest all kinds of different scenarios, Trade
Station, eSignal, Forex Tester and MT4 are only a few of them. Forex Tester allows you to
import any data so that you can use it for backtesting stocks, indexes, ETFs and futures
as well. Don't be fooled by its name.

The law of conservation of energy states that energy can be neither created nor
destroyed, but can change form.

We could say that there is a law that we would call "The law of conservation of your
capital", it states that:

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Money goes from the hands of those who don't know what they are doing to the hands
of those who know what they are doing (professionals).

The benefits of backtesting

We get what we focus. Winners win because they focus on winning. This is what the law
of attraction also says.

Our brain is not able to differentiate between actual experience and a strong input
through imagination. Suppose we can generate solid sensory visions of success. If we
could, it would produce a strong passion for focusing on what is desired to achieve it.
For instance, following rules, the trade plan, a disciplined routine with proper protocol.

• You are gaining new insights and aha moments. Each time you complete a
testing session, you will learn fresh ideas. You will say to yourself, "Can you
believe people trade without having tested their strategy? Crazy!"
• Gaining an edge and proving to yourself that the edge works overtime and
under any market scenario
• You are stamping out your ego. You will learn a lot about mood control and
controlling your ego (ego = I can do this supply and demand stuff "my way").
Trade as much as you can as long as you don't become anxious. One of the keys
is fostering a calm, relaxed rhythm while drawing zones and trend lines and
assessing trend, control and SD Range. Later you can expand that to set up
simulated trades. It feels so clumsy at first but gets easier the more you progress.
You are training a subconscious part of your mind - like learning to drive.
• Speed up your learning process by fast-forwarding time; scenarios will be
presented to you without having to wait for weeks or months.
• Gaining confidence in the set of rules
• It helps remove emotions and fear when we switch to live trading
mode because we will know we have an edge and the odds are with us.
• We want to know if the strategy works before we trade live.
Like everything in life, there is a trick to it when bringing your experiences and lessons
gathered in testing to your actual trading. Those that have tested the rules have
experienced that by themselves. We have also heard this phrase from the traders we're
in touch with: "I can make money with my strategy when I test, but then I lose money
when I try to do it live."

Testing your strategy will help you build new neural pathways to cement confidence in
the system inside and out. When the trade setups appear in live scenarios, pulling the
trigger becomes a natural and emotionless thing to do with proper confidence.

A word of advice on tricky scenarios

Let me share what I've learned through the years. Complex and tricky scenarios? I ignore
them. I don't test them. I don't waste my precious time on them. Why should I? I don't
need to understand every bit of price action and what is going on on every single
candle. I ignore that and focus on what is clear and obvious. Tricky scenarios are just the
opposite. I decided to focus and test only scenarios that have a high probability. Time is
the only thing we can't buy with our money; I don't waste it. I believe the older we get,
the closer we get to this realisation.

How to make the transition from backtesting to live trading

There is a complex transition when we decide to go from reading the lessons to forward
testing. Then there is an even more significant change going from backtesting to paper
money trading. Now imagine going from demo trading to live trading. The leaps are
profound and a vital learning experience for every trader. Each phase has its challenges,
and the mental/motivational challenges are the hardest. These are the 'frustration'
barriers one has to keep pushing through, over and over again, until a breakthrough
occurs, and the new understandings snap into place and become natural reactions. It
only happens with backtesting practice and hours upon hours of screen time.

Your backtesting will show slow but steady improvement, but overall your results should
deliver better consistency with time. You will be pretty amazed at how supply and
demand works! This will keep you motivated if you are doing things the way you have
to.

You will encounter a whole new set of obstacles that you need to get out of the way,
which takes time. After you make hundreds of trades, trading will become a boring
routine. At that point, you will probably get close to your testing results. Learning the
rules is the easy part that does not need to take more than a year, but the emotional
and psychological component takes much longer. You need to change your nature
completely. Reprogram your mindset.

Markets go against the innate instincts and everything you have ever learnt in a
"normal" life. That is why only a tiny percentage of people can make it. That is why the
retail traders are called "the herd". Because they follow what they think/feel is right for
them, but it does not work in this unique environment.

Some people are lucky to have a proper mindset right from the start. Maybe because
they were raised in an appropriate environment, perhaps for other reasons, you don't
need to know why really. But most of us are bearing some burdens from the past
(seemingly long forgotten) that will become apparent when we step into the markets
with our own money. All those fragments from the past are still with us, and we need to
deal with them.

People always ask me for advice, guidance or some secret pill that will make them
profitable. There is no trick. There is no one thing I can say to you that will change your
entire trading mindset and make you a millionaire overnight. Your choices are that you
can give up or keep going and eventually make a little bit of cash from your trading, and
then more and more.

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On the left, there is a history. On the right, there is a mystery.

Be a scientist. Don't cheat.

• It can be challenging to use the tester software and plan a trade without looking
ahead first to see what has happened. I know this because I did it in the
beginning, but it's true.
• You can't cheat when you trade live, so you have to develop the discipline to
prevent you from doing precisely that when you test
• If you fast forward to see what happened before placing a trade, the only person
you're cheating is yourself.
• Look at testing as scientists do, do not care about the outcome of any one
experiment. They're just looking to see what happens, without bias, without
emotion.

Backtesting should be part of your daily/weekly routine.

• It's funny, but when we start backtesting, we think that a few days or a couple of
weeks is just enough. When we see that we are getting more or less the entries
 that we want, we'll rapidly switch to live to trade and try to obtain the same
results. It doesn't work like that.
• Don't stop testing after a few days or weeks. Testing should be part of your
weekly routine. Will you stop eating tomorrow or after tomorrow because you
had a feast today? No, you won't, you need food as much as your trading needs
testing.

Don't get excited when a trade is successful, and don't get upset when it fails.

You're just gathering data and statistics while you test, so there's no point cheating to
balance the results one way or the other.

Use honest position sizing. Win/Loss Ratio and Risk/Reward is what matters.

• If you want to test how the set of rules work and how all pieces of the puzzle are
put together, you don't need to use the exact position size (lot or contract) for
every single trade that you take while testing. That would slow the process down.
• Use the exact position size for all the trades you take. It's easier and faster. It's
too tempting to become lazy about taking the extra time to use a lot or contract
size calculator to determine your exact position size every time.
• Win/Loss Ratio and Risk/Reward is what matters. You want to test how good you
are at spotting your entries and exiting them when you have to close them. That
is all.
• If you want to test how equity changes with real money management in play,
don't use one standard lot for each trade because that could represent about 5%
or more of your account per trade. Your testing account can go into severe
drawdown, and the results won't be real.
• If your backtesting is sloppy and is based on mistakes, you're just going to get
garbage as your results.

Is your strategy really the same?

If you are fuzzy about your trading rules, there will undoubtedly be a big difference
between your backtest results and your live trading. Take time to write out your Trading
Plan and then read it through before each testing session you do before each live
trading session. Ask the right questions- Watch for specific areas you might be missing
when you test and trade.

Start thinking that your live trading is a video game.

It puts you in a state of mind that helps remove emotion from trading. Suppose you
can't think of a trade as a video game. Suppose you break out into sweating with each
trade you take. You are only using a very high-risk profile. If you can take a trade
without breaking out into a sweat as you contemplate losing that amount of money on
that particular trade, then you're using the correct risk profile for you.

"All or nothing" attitude.

If you can't backtest at least 1 hour a day and three times a week, don't backtest.

Re-program yourself, create a life of balance in all areas. Your entire way of
needing to change.

You have to do a lot of work on yourself, including creating a life of balance in all areas
before you can backtest consistently, keeping a schedule, backtesting at the same time
every day. This all may sound easy to accomplish for some, but you'll have to start to re-
program your attitude about work, life and about yourself, attitudes that you will have
probably had your entire life as long as you can remember. You have to project yourself
as a successful, consistent trader. If you want that future self, you have to grow, and
growth requires expansion. It may be uncomfortable for a while, and you may slip up,
but you will be learning that being a trader is far more than just following a set of rules.

Match emotional states.

Are you patient when you test? Virtual time goes by very quickly. You press the forward
icon, and one day or one week has passed. That does not happen in live trading, 24 x
hourly candlesticks are needed for a daily candle to close, one full day, not 1 second.
You will be impatient with how slowly the live market unfolds in real-time and end up
making rash decisions because you can't handle the timing differences. If that's
happening for you, the first step is to acknowledge it. Then you need to come up with
methods to work with your impatience.

• Multitask with a different activity - it doesn't even have to be related to trading.

The more fun, the better. While you wait for a good trade setup, do crossword
puzzles or sudoku, do some work for a volunteer, and offer you support. This is
valid only if you are doing tick testing and not candle close testing as we usually
do.
• Practice outdoor activities, get involved in any outdoor activity that keeps you
away from your trading platform.
• Meditate. A half-hour a day - great for managing emotions.
 • Use backtesting software to practice your trading while you wait for real trade
setups to form.
• Notice I don't include chat rooms, Skyping, testing or reading on forums. You will
see your trading improve dramatically when you stop participating in chat rooms
and stop listening to other peoples chats. The community is a great place to get
advice and new trade setups but take them only if those setups make sense to
you, and if they follow your trading plan, don't let others trade for you.

You will feel overwhelmed but the number of rules and work you need to do will
make you think of giving up.

Take your time to spot the imbalances. You will start getting excellent backtesting
results if you keep on working day after day. The thing that will help you loads will be to
slow down and observe. Go at a snail's pace! If you have 1 or 2 hours set aside for your
testing each day, it doesn't matter if you take a trade and make money on your
backtesting account. Analyze candle by candle as and it does become a lot clearer at
this pace.

Live trading is a different beast.

Your testing sessions may be going great, you can do a great top-down analysis of any
instrument really well, but live trading is a different animal. You must tame the beast.
Live markets are very different. You don't just trade one instrument but many of them at
the same time. That is a significant psychological weight that can't be measured during
the backtesting because you can only test one asset simultaneously so that losses won't
affect you that much while testing. It's common to have a win/loss ratios of 60-75%
while testing, but when you start to trade live, that % goes as low as 40-50%. That's how
it is. Psychology is critical.

There is no such thing as "the last piece of the puzzle".

You may have often heard about "the last piece of the puzzle" and other stuff that
prevented people from becoming profitable. People feel so close, but they can't make it.
So they try to find that piece of the puzzle to make them complete. There is no last
piece. It is a trap that drives people insane, like a dog chasing his tail—chasing a new
indicator, a new rule or a new pattern. If there is anything that can be called the last
piece, it is in our heads.

Planning our trades and having them scrutinized is how you learn.
Only the live markets will have your emotions more involved and therefore manipulate
your judgement. I believe it's essential to have your live trading set-ups analyzed by the
community so that you can tweak your brain. It's the ability to analyze the charts to
make you a profitable trader until you have mastered your skill. Ask your ego to stop
talking and let your inhibitions take a back seat, get your studying of the rules right, and
let's start posting more trade set-ups!

Start your backtesting routine

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Cut your excuses in half and double your action. Your excuses are nothing more than
your fears coming to get you.

Practice is key to success, don't forget about this. As Bruce Lee said:

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I fear not the man who has practised 10,000 kicks one, but I fear the man who has
practised one kick 10,000 times.

Backtesting the trading methodology by yourself can't beat anything.

The experience and confidence you will gain from it can't be found in textbooks. You
have to learn it through experience. Even if it was on a book, you have to experience it
to sink in your brain. You have to see the supply and demand imbalances being
respected and/or eliminated over and over again with your own eyes.

After months and years of doing this, it will become second nature to you. That does
not mean you won't make any mistakes when trading live. You will make many, but
that's part of the trading game, making mistakes, you have to account for them and
move forward.

How can you reduce the number of errors that you make?

Do the same thing over and over again for months and months. Repeat, repeat, repeat!
It's only through repetition that success can ever happen.

Does the market you are backtesting really matter? I trade stocks and cryptos. Why
should I backtest futures or Forex pairs if I am not trading them?

The market you backtest doesn't really matter. Supply and demand is a "universal" rule
that applies to all markets, Forex, equities, indexes, shares, commodities, bonds,
anything. The experience you gain can be applied to all markets, so do not
underestimate it. It's also possible to import historical data from any instrument into
Forex Tester, so the platform becomes even more powerful.

By backtesting the methodology, you will gain confidence with the strategy, thus having
less fear and indecision pulling the trigger. Reaching a 50% or 60% win/loss ratio on
your backtesting for months is all you need. You can't get that confidence in live trading
unless you spend years, you can't fast forward time in real life, but you can with
backtesting software.

Still not convinced?

Well, it's up to you! It's your trading career and your life! I can't help you there. You
know that this is the way you have to go, but something within yourself believes it's a
complete waste of time, and you will not probably spend the time you need to become
a successful trader in any given strategy. The only thing I can say is that you will not
have the right to complain to others if you don't do your homework if you don't do
what you have to do to think and behave like a professional. You probably think you are
more intelligent than others, and you can make it without the backtesting.

Is backtesting a waste of time?

No, it's not. It will open your eyes to any strategy that you are looking to learn and gain
confidence in. Instead of being in front of your trading platform for hours every day,
why don't you spend a few months backtesting the strategy to gain confidence?

You will have doubts about everything

It will be absolutely normal that you doubt your trading setups. You will have doubts
about everything and start taking lots of losses. This is why you are testing in the first
place. Imagine yourself in live scenarios with real money, your own money. You have to
reach a point where backtesting and rules are second nature to you, then finally switch
to a small live account.

A horrible little demon that can get to you is the negative feelings when you lose a trade
and even worse when you suffer a series of consecutive losses. It can get so bad that
you could end up stomping around the house and shouting just to let off steam. Finally,
you will learn to say 'thank you for each loss". At first, the losses are teaching tools to
correct the misapplication of the rules. But later, at a deeper level, you will realize that
the losses ARE NECESSARY for the wins. You will already know that intellectually but not
in your gut. The losses are telling you that the currents are shifting. You had better love
them -- they are your friend.

This is a process we all need to go through. Those that think testing is not needed will
most likely be trying to outsmart the markets because they "think" they don't need to
go through months of boring tests without earning a single dime. The results are well
known to most of us. It usually is disastrous.

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All change and challenges are hard at first, messy in the middle but so beautiful at the
end.
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Go for what's difficult, run to your fears, go to the edges of your capability.

It just works, guys! If you don't believe me, I can't do anything about it. Backtesting will
help you a lot, but it's your decision, not mine.

What you intend to do now?

Whatever legacy you are going to leave, leave your legacy. Wins and losses come a
dime a dozen but effort? Nobody can judge effort.

Everybody is got a dream. Everybody is got a goal. The question is, when you wake up in
the morning, what effort will you put in for?

If you died now at this very moment, what would die with you? What dreams? What
ideas? What talents?