Now, what is backtesting? As the omniscient Wikipedia puts it, “Backtesting is a process, usually performed with aid of computers, by which traders try to estimate how financial instruments would have performed in the past had a particular mechanical trading system been employed to trade them.”   Sounds perfectly legitimate, but it isn’t.  

Backtesting is by definition performed on a finite set of data.  That could be anything, but usually it’s a set of price series.   Therefore, no matter how much or how long you backtest your forex trading strategy, the only result that you can get is that it behaves in a certain way in SOME circumstances – precisely, those that were used for the test.  It remains completely unknown how it behaves in ALL OTHER circumstances, i.e. untested – and that includes the future.  No method of backtesting, regardless of its complexity and involved precautions, can work around this.  No amount of backtesting can predict the future behavior of a forex trading strategy in real life.

So what is backtesting good for?  Well, if it is done properly and the sample is big enough, it is everything it is said to be – just if you use the word “may” instead of “will”.  A proper backtesting result is an indication of a tendency of a forex trading strategy to behave in a certain way.  Nothing more, nothing less.  It is not a guarantee.  Also, notice the word “proper”.   The many ways to get a result that does not indicate anything include using commercial backtesting software.  I’ll get into that some time.    

Still looking for the Holy Grail.

Forex mini trading is halfway between demo trading and real online forex trading.  Like demo accounts, most mini forex accounts have orders executed automatically by a computer which is way more forgiving than a human dealer executing real market orders.  Unlike a demo account, you have money at stake, which greatly enhances the trading psychology aspect of learning.  Also, forex mini trading makes it possible to practice money management techniques without risking too much capital.  

Because of automatic order execution, forex mini is mostly suitable for learning position trading and swing trading, where precise order execution is not so important.  If you develop a strategy of this type using mini forex, it usually can be applied in real market with minor modifications.  On the contrary, any type of scalping and day trading strategies that rely on immediate order execution to skim a pip here and there may work in forex mini, but are all but guaranteed to fail in real life.  The primary reasons are delays (the computer always executes promptly, while a dealer is often flooded with orders when the market moves fast) and slippage (the computer always executes at last quoted price, while such price may be simply unavailable in real market).  Spreads can be less favorable in real accounts as well.

One of the greatest features of a mini forex account is the ease of practical application of proper money management techniques.  It is our considered opinion that money and risk management are far more important than the trading strategy itself.  Indeed, it has been shown that random buy/sell decisions in combination with simple money management and position tracking strategies yield better results that any pure trading strategy.  Thus, unless you are willing to commit tens of thousands of dollars, your cash is a lot safer in a mini account.  There simply isn’t enough room for error to wipe it out with one unsuccessful trade. 

Now, why would anyone bother to open a real forex account if mini is obviously so much better?  Well, brokers know that, too, so they put a cap on the maximum amount of money in the mini account, or on the number of positions, or on position size, or maybe on all of the above.  You can make an astounding 1000% profit in forex mini trading, but it will still be only a measly $100 in absolute terms.  You’ll have to move out to the real world if you are to make any real money.  Experience with a mini account is just a great way to do that prepared.  

Books and websites teach you principles.  It is up to you to learn application.  All you need to know to begin trading can be read in an hour.  Another day of reading is not going to get you anywhere.    

Simulated trading in a forex demo account teaches you to use your forex platform.  It has little value beyond that, it’s just a computer game.  Once you know which buttons to push, you’re done.  Another day of playing computer games is not going to get you anywhere.

Trading in a real forex account teaches you to lose.  Books and games can not prepare you for the encounter with your own greed and your own fear.  Once you know that the market is smarter than you, and there are no shortcuts, you’re done.  Another day of losing is going to get you in trouble.

Time to read books again.  

This is the fastest way to make money on forex that I know.  Start today.