In this episode of Truth About FX, Walter digs into backtesting and the possible answer to this question: does it matter when the charts close? According to him, it all boils down to what you’re really looking for in your trading. What are your goals? Does your current timeframe fit with your habits as a trader?
Download (Duration: 03:52 / 4.42 MB)
In This Episode:
00:40 – basic choice
02:23 – really solid
03:15 – simple system
Make sure that those candles are really solid. [Click To Tweet].
It depends on which timeframe you are trading. [Click To Tweet].
Does my data fit with what my charting package shows? [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. Does it matter when my chart close? Should my backtesting use the same closing time?
Walter: That is an interesting thing. If you are trading the daily charts or the weekly charts, it’s probably not going to matter that much although the basic choice you have to make is, “Am I going to have a 5 pm New York time close on my daily chart or is it the midnight GMT?”
What that usually means is that if you use the midnight GMT close, obviously, your daily candles will look a bit different and your weeklies as well but what end up happening is you get a little, tiny candle on your charts.
It’s like a 2-hour Sunday candle, if you trade with midnight GMT. If you trade with New York 5 pm close, you do not get that candle which is really the only reason why I prefer the 5 pm close.
It depends on what you’re after now. If you are trading — let’s say that you are trading like a 4-hour candles — you have to wonder, “What should I do here? I don’t know if my data fits what my charting package shows.”
I believe that, in essence, what you’ll end up seeing is maybe you see a few more trades on one than the other but then you’ll see a few more on the other timeframes as well. It’s not that big of a deal but I do think it becomes — the data that you are using in your backtesting — becomes more important as you get lower and lower in your timeframe.
Here’s why I say that. If you are trading like the one-hour, obviously, it doesn’t matter. If you are trading the 4-hour or the daily, it’s going to matter a bit on when you close, when your charts close.
If you’re trading 5-minute candles or 15-minute candles, anything under an hour, you probably want to get some really good data in there. That means you might have to pay for it. It may not be free for you.
So, you want to make sure that those candles are really solid because if they’re not, you can really mess yourself up in your backtesting because, remember, you are paying a higher commissions when you do that too.
When you start trading the lower timeframe, you’re going to pay more in commissions. That is just part of the deal. The reason why, of course, is if you pay — for example — if you pay a pip on every transactions and you’re only going for 10 pips, you are basically paying 10% commissions.
If you pay a pip on your commissions and you’re going for 500 pips, that’s like much, much less. You are talking about here less than 1%. These are the sorts you have to keep in mind but I really don’t think it matters when your charts close to answer the first question.
As far as your backtesting, I think you should try and keep it as close as possible. Although, I will say I think that when you have a simple system, when you’re looking at engulfing candle or Big Shadows or whatever, it’s not going to be that different.
You may see a few more trades on GMT close, you might see a few more trades on the New York closes. It tends to balance it out. I think people spend too much time on these stuff. It’s only really relevant if you’re trading the really low timeframe. That’s my point of view.
Hugh: Okay, cool. I think people are super serious about it but, like you say, it doesn’t really matter on the end because you’re going to doubt. So, thanks for that, Walter. Appreciate it.
Walter: Thank you.