Day Trading, Forex or
Currencies Back
Testing - A Way to
Improve Your Trading
Score
You can draw some useful parallels
between running a business and Day
Trading, Forex or Currencies trading. For
instance, most successful businesses
keep statistics on everything from their
conversion rate, to their average dollar
sale, to the number of people that come

in the door. Businesses do this to keep
on top of how they are doing on a day to
day basis and businesses must first take
score before begining to improve on that
score. Using a Day Trading, Forex or
Currencies back testing plan in your
trading works exactly the same way.
Now that you`re looking at Day Trading,
Forex or Currencies trading as a
business, you need to learn some
valuable statistics about your system so
you can improve it`s performance. You
would use a Day Trading, Forex or
Currencies back testing method. You
can`t improve your system unless you
have something to measure it against.
How could you expect to improve your

trading unless you knew what it was you
were looking to improve? You can
discover these measurements and other
valuable information about your trading
system, by using a Day Trading, Forex or
Currencies back testing plan.
There are two ways that you can use a
Day Trading, Forex or Currencies back
testing plan to back test a system. You
can do it manually, which can be a
drawn out and labour intensive process,
or you can do it with the aid of some
software packages. Unfortunately, I
recommend you do it by hand when you
first start out. You`ll get a much better
feel for your system, and you`ll
understand exactly how using a Day

Trading, Forex or Currencies back testing
plan works in all its intricacies. Once you
have the Day Trading, Forex or
Currencies back testing plan and the in
depth knowledge, you could look at
finding a software package that does it
for you.
There are a few major statistics on your
Day Trading, Forex or Currencies back
testing plan that you need that you will
uncover through back testing. The first
statistic you need to become familiar
with is the R multiple principal. R stands
for risk, the risk you take on any trade
when you enter the market. The R
multiple of a trade is the ratio of the

profit or loss compared to the amount of
money risked to make the profit or loss.
Therefore, if you risk $200 dollars in your
initial purchase, and you make a profit of
$1,000, you have made five times the
amount you risked in the trade. You
have an R multiple of five. This statistic
gives you a good idea of the relative size
of your profits to your losses. You can
compare the average size of your
winning trades with the average size of
your losing trades.
The next statistic you`ll find useful is
your win to loss ratio. This is how many
times you get a winning trade in
proportion to how many times you get a

losing trade. For example, if you had ten
trades, four of those trades were
winners, and six were losers, your win to
loss ratio is simply four to six. This is
your hit rate; you`ll get 40% of your
trades correct.
With these two simple statistics, you can
calculate the average size of your profits
and of your losses, multiply these figures
with your win to loss ratio, and calculate
on average how much money you make
with every dollar you risk.
For those of you who think this sounds
like a too much work, particularly using a
Day Trading, Forex or Currencies back
testing plan that you need to do to

uncover these statistics, consider this
scenario: Imagine yourself trading a
system that you knew had a win to loss
ratio of 60/40. You made profit on every
six trades and lost one out of every four.
How do you think you would feel, where
would your confidence level be, after
you traded the system for a little while
and you received a string of 11 losses in
a row?
Now, you know that this system has a
win to loss ratio of six to four. Would
you have the confidence to open
another trade if your system brought up
another buy signal after getting 11
trades wrong?

Unless you use Day Trading, Forex or
Currencies back testing plan to back
tested your system, I doubt that your
confidence level will remain high. That
trading system may be a fantastic
profitable system. However, since you
didn`t use your Day Trading, Forex or
Currencies back testing plan to back test
it, you don`t know that historically this
system received up to 13 losses in a row,
but was still profitable.
Here`s another point you may not have
picked up unless you used your Day
Trading, Forex or Currencies back testing
plan. Once you`ve set your money
management rules and you begin to
trade, you will likely experience a string

of losses. Countless times, I`ve had
clients who get disheartened by this fact
because they don`t understand the
nature of setting good management. If
you`re adhering to the rules of cutting
your losses short and letting your profits
run, because you`re cutting your losses
short, those trades are going to last for a
shorter amount of time.
This means once you begin trading the
odds of getting losses early in the game
are much higher than getting a winning
trade. This is particularly true when you
consider that many successful trading
systems run on a 40/60 win to loss ratio.
However, you will never know the
intricacies of your system unless you use

a Day Trading, Forex or Currencies back
testing plan and back test it.
Using a Day Trading, Forex or Currencies
back testing plan, will help you to
understand what works and what
doesn`t. It will give you the statistics to
gauge the effectiveness of your trades. It
fills in your scorecard, and allows you to
make improvements. But, you shouldn`t
simply believe everything I`ve told you.
Instead, you need to prove it to yourself
by using some Day Trading, Forex or
Currencies back testing plans and back
test your system.
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