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Cracking the Code of Trading Success: The Power of BacktestingHello, fellow traders! Today, let's dive into the world of backtesting. But first, what exactly is backtesting, and why should you care? Backtesting stands as one of the fundamental pillars of any trading system. This process involves testing your trading strategies against historical data to determine whether they stand the test of time. Additionally, backtesting serves as a potent tool for bolstering your self-assurance in your trading capabilities. When a trader comprehends every nuance of their system and its profitability, they become resilient in the face of losing streaks, handling them with poise. Now, let's break down these variables you should consider during backtesting: • Risk-to-Reward Ratio • Win Rate (the percentage of profitable trades) • Optimal Timeframes for Strategy Execution • Assets Where Your Strategy Excels During backtesting, you have the liberty to tweak and fine-tune these variables. For instance, if you wake up in the middle of the night with an urge to test imbalances after daily highs/lows on the EURUSD pair—go ahead, conduct the test! Here's a set of rules to guide you: • Note the Previous Day High/Low (PDH/PDL) at the start of the trading day. • Wait for liquidity to be drawn from these levels. • Anticipate an impulsive break of the structure accompanied by an imbalance on the H1-M15 timeframe. • Enter based on this imbalance with a take profit target set at the nearest liquidity pool, where the Risk-to-Reward Ratio exceeds 3. • Position your stop loss behind the swing that triggered the liquidity draw. • Remember, no drawdown and reversal mean no trade. After conducting your backtest, analyzing the results, your journey is far from over. This is where you transform into a scientist, forming hypotheses: • What if you wait for a structure break on the M5 instead of the H1-M15? • What if you enter from the imbalance and set a fixed Risk-to-Reward Ratio of 4 instead of targeting the liquidity pool? • What if you place your stop not behind the swing but behind the first candle of the imbalance? In the end, you'll amass a treasure trove of data that will illuminate your path, helping you discern the best course of action in various trading situations. PDH/PDL becomes EQL/EQH, opening the door to fresh scenarios for backtesting. Yes, it's a challenging and time-consuming process. Yes, it may leave you feeling exasperated at times. But always remember your ultimate goal: you're searching for what will generate profits, seeking that elusive edge. That's precisely why I recommend selecting a handful of assets and thoroughly understanding their unique characteristics. Learn how they behave in trending markets, during ranging periods, where they tend to offer favorable entry points, and which sessions they perform best in. Dive deep into Risk-to-Reward Ratios, win rates, position sizes—the whole gamut. What works impeccably for BTC might spell losses for EUR, and vice versa. In an ideal world, focus on one instrument and trade it until you know it better than your own hand. Trading is about automation, embracing the monotony, and banishing emotions from the equation. Now, what are your thoughts? Feel free to share them in the comments!
Education
by Ingwina
Five Demons that lead to Trading Losses The greatest adversary of a trader is not the market, nor the constantly changing market trends, but rather ourselves. Therefore, today I will share my trading experience and explain the five most difficult demons to overcome in our trading journey. 1.The first demon is greed. Greed is the biggest demon in trading. Where there is greed, there is an abyss. It can be said that 90% of psychological problems in trading stem from greed. What are the manifestations of greed? Not wanting to miss out on market movements and trying to buy at the lowest point and sell at the highest point is greed. Not wanting to miss out on any market movements of any kind is greed. Pursuing the perfect trading system is greed. Even not willing to accept losses is greed. Pursuing high-risk trading for quick profits is even more greedy. Childishly pursuing financial freedom through trading is the greediest of greed. There are too many examples like this. 2.Heart demon 2: Fear Many people have poor execution in trading, mainly due to fear. What are the manifestations of fear in trading? Being bullish on a market but not daring to open a position due to fear of loss. Even when the trading plan is clearly defined, entry and exit rules are obvious, and position sizing is appropriate, when the conditions for opening a position are met, the button for opening the position cannot be clicked and the opportunity is missed. Having the correct position and being profitable but not daring to hold the position, afraid of losing profit due to the fluctuation of the market, resulting in hasty liquidation. The inability to set a stop loss is also a manifestation of fear, afraid of not being able to recover losses. Using smaller and smaller position sizes, finally opening a position of 0.01 lots, but still feeling conflicted. 3.Heart demon 3: Short-sightedness Traders must have a perspective. I often say that we should examine trading from an aerial perspective. Trading is like a maze. Only when we stand at a high point and overlook the maze can we find the correct way out. We must not plunge into the maze. What are the manifestations of short-sightedness? When a trading system is initially profitable, you think it's great; when losses occur, you immediately want to give up or change the trading system's settings. Unbeknownst to many, profits and losses come from the same source. Trading systems are bound to have matching and non-matching market conditions. Dismissing a trading system due to short-term gains or losses is a manifestation of short-sightedness. On the other hand, a trading system making money for a period of time does not necessarily mean that the system will continue to be profitable. Profitability is only a result of matching market conditions. Overvaluing a trading system due to temporary profits is also a manifestation of short-sightedness. Therefore, many people eagerly show me their profitable trading systems of one or three months, but I maintain a conservative attitude and suggest we discuss the issue again after one year. 4.Heart Demon Four: Anger When it comes to anger, everyone can easily understand that it is a significant issue not only in trading but also in work and daily life. Under the influence of anger, a person's IQ is reduced to only 30% of its normal level. Our judgment of trading results and risk perception will be greatly biased. Specifically, anger manifests as frequent trading after losses, heavy positions, and expecting to make a profit to recover previous losses. However, the heavy position trading profits cannot be sustained, and when the market does not follow expectations, the trader may be reluctant to cut losses, resulting in margin call and a vicious cycle. 5.Heart Demon Five: Arrogance The trends we trade are the future, and humans are powerless in predicting the future. Even a successful trader may not be able to judge the direction more accurately than a primary school student based on a single chart. This is due to the randomness of market trends, which no one can change. Here's the problem: some people always spot market trends and get good returns during a certain period, which causes them to become arrogant. It is like some novice traders who, after a few short-term profits, begin to have great confidence in their trading ability. This is what we call the "beginner's luck," which is followed by losses due to luck. These are the five heart demons that lead to trading losses. Many of us have experienced these errors. If you are also troubled by these heart demons, we hope you can face your problems and slowly change.
BITSTAMP:BTCUSDEducation
by Navigation-h