In this episode of Truth About FX, Walter talks about testing multiple markets or multiple timeframes at the same time in a forex tester. According to his experience, there are a number of set-backs you could get from doing this. Walter also gives a reliable and simple tip a realistic equity curve that you could use on your trades.
Download (Duration: 06:35 / 7.53 MB)
In This Episode:
00:53 – painful
02:06 – flattens out
04:18 – calculator
06:03 – spreadsheet
Take up all your data and put it in a spreadsheet. [Click To Tweet].
Know your numbers, your average winner and losers. [Click To Tweet].
Hope for the best but plan for the worse. [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. When you are doing some backtesting, do you ever test multiple markets or multiple timeframes at the same time in forex tester?
Walter: I used to do this and what I found is that you end up messing up. You miss some trades and then you go back and back space and say “I would’ve taken that” but the problem of that, of course, is now you’ve seen the future.
It’s like you are using hindsight bias in your backtesting which is awful so I just stick to one pair and now, I know it is painful, I know it takes forever. I know people do not like to do that but it really does make sense.
Otherwise, you have to advance one bar, check all the chart, advance another bar, check all the chart and that is painful too. I would just go with one and if you are trading the weekly charts or the daily charts, you are not going to get a lot of trades anyway so you can blow through those data.
Those data might take you only… Ten years worth of trades might take you only two weekends or something like that or ten hours of trading so testing in forex tester, it’s not that big of a deal.
I just break them up like that and, here’s a tip, you can take up all that data and put it in your spreadsheet, sort it by date. What that means is you’ll get an equity curve of what it would look like if you are trading that in the real world.
You’ve done all these EUR/JPY testing, GBP/AUD testing and USD/CHF testing, you put those three pairs together and sort by the entry of the trades. When you get into the trade and what you have is you’ll have these winners and losers that are popping up on your spreadsheet.
You can draw your equity curve based on the balance of the account and then you’ve got some really cool… Because you can see how trading multiple markets flattens out your drawdown and things like that.
Walter: That is a really cool way to see that.
Hugh: That is a great tip. While we’re around the topic, putting the data into a spreadsheet, what else could you do with the spreadsheet that maybe you couldn’t do in forex tester too?
Walter: With the spreadsheet, you can change your risk parameter. Let’s say that you are trading 1% risk on each trade so you could automatically change that in your spreadsheet and that will change your whole result.
You will just multiply that. So, if you are trading 1% and you want to change it to 1.5 or 2 or 2.5 or 3 or whatever, you can multiply that whole column where the… You know what I mean?
What that will do is that would basically increase your drawdown, the depths of your drawdowns and the peaks of your equity highs and things like that. It’ll show you the effect of taking more risk on your bottom line and on your equity curve.
Another thing you can do with the spreadsheet — what I like to do is see. Obviously, you want to get your win rate and all that but then what you want to do is you want to go “How many losers am I getting in a row and how likely am I going to get an x number of losers in a row?”
You can plug those into a calculator, I’ll actually link that up in a shownotes for this episode. You can go to a calculator and plug in your risk/reward ratio which is your average winners size divide it by your average losers size.
You plug in your risk amount per trade, you plug in your win rate and then say “Okay, I want to know how likely it is that the over the next thousand trades or 10,000 trades I am going to have a drawdown of 10% or 20% or whatever.” It’ll spill out that data and it’ll say you have an 88% chance of a 10% drawdown.
You’ll know that if you are risking 1%, you are definitely going to have a 10% drawdown. That does not sound a lot but a lot of people do freak out when they get into that 10% level or 50% level, they’ll start changing things so that is really a cool thing to do too.
Get your numbers, your average winner, your average losers, your win rate and then what you’ll do is you plug that into that calculator that I’ll give you and really assess because what you really want to do is plan for the worse.
You hope for the best but you plan for the worse and go “Alright, I’ve got a 33% chance of a 15% drawdown. That is a 1 in 3 chance over the next thousand trades, I am going to have a 15% drawdown”.
That is a pretty solid shot so you want to anticipate that and you do not want to freak out and think that things are falling apart when that happens because you already know that was likely and now it is happening.
Hugh: Okay, cool. What about the day of the week analysis, do you ever do that?
Walter: Is that what you are getting at? Good point. I do that. It’s funny, we had an interesting conversation about that in the forum but basically a lot of guys have taken me up and I said “Look, go ahead, test it and see”.
A lot of guys have posted their data and they found that Mondays and Fridays are awful for taking daily chart trades. Some people say “C’mon, Walter. That is crazy” or whatever but there’s a book actually, I should tell you guys. I’ll link that up in the shownotes.
There is a trading book that you should check out if you do not believe this. If you think this is a crazy idea, there is this trading book that has all of these crazy trading systems just based on these things.
It was built for like SMP500 and stuff but, basically, it’s like if Tuesday is an update, sell on Wednesday. All these weird rules that you can see that these are trading systems that people use.
I think it is called Trading Secrets of the Inner Circle or something crazy like that because it is a weird book. I definitely avoid Mondays and Fridays, I find them to be awful and you can see that in your spreadsheet too so, that is a really good point.
You can make it so that the spreadsheet shows you if a day is Monday or Friday or whatever and then you can plug those, but I just don’t take them when I do my testing. I actually just skip through the Monday and Friday trades in forex tester because I don’t have to weed those out anymore.
Hugh: Cool! That is a lot of great tips. Thanks, Walter.
Walter: Oka. See you, Hugh. Bye.