As a forex trader it’s imperative that you spend time honing your edge and practicing your strategy by backtesting regularly. The best way to develop and refine your edge is to use bar replay to measure the efficacy of your strategy when executed by you (the trader). 

Backtesting involves using historical data to see if you can produce a positive return in the market, either by doing pure bar replay or rewinding and practicing taking trades that fit within your personal trading plan.

When you simulate trades in a backtesting session you benefit not only from building your pattern recognition skills, but you can also gain insights on things like your trade psychology and edge as you test it on historical price action in the markets you trade. It can also help you identify key strengths you have in your trade setups and an understanding of the market as well as your weaknesses.

In this article, we’re going to cover five different exercises you can use to really hone your edge as a trader. The best part is, it doesn’t matter whether you’re an absolute beginner, intermediate, or professional trader. Doing these exercises will only help you sharpen that edge.

What You’ll Need To Get Started Backtesting

First, let’s cover everything you’ll need to actually get started. Obviously, there are multiple ways to backtest and multiple different sim trading software programs, but let’s cover the basics.

  1. A strategy/trading plan to test. Assuming you’re not a Phantom Trading member, you’ll need some sort of strategy or framework to actually test. This could be your own personal edge, or the Phantom Trading supply and demand strategy.
  1. Backtesting software. Either you can use Tradingview bar replay if you already have a subscription or you can use tools like FX Replay (Webapp), Soft4FX(MT4), or Forex Tester 5 (Standalone software).
  1. A clear goal in mind. Best to pick one or combine any of the five exercises below and try to strive for a goal. Avoid mindlessly backtesting as it can be counter-productive.

Market Structure Exercise

The first exercise we’re going to cover is the market structure exercise which comprises of simply marking out market structure on multiple timeframes to get consistent with your structure rules. This is one of the most important skills you need to develop for determining things like market direction and overal trend in the market, so expect to spend a good deal of time on this one. We suggest checking out our article on the forex market structure or our YouTube video to learn how to do this in an effective way:

In your backtesting simulator, without taking any trades simply mark your swing structure points, structure breaks, and observe the trends that form on each timeframe. You may also mark up internal market structure on the mid to lower timeframes in order to practice your orderflow recognition skills!

Liquidity Exercise

Next on our list of exercises is built around trading exercises that utilize liquidity concepts for determining things like direction and manipulation in the market(s) you’re trading. Typically, supply and demand traders use this concept heavily in their technical analysis, so if you’re a supply and demand trader like us at Phantom Trading, we highly suggest using this exercise to hone your skills further!

Check out our article to learn about liquidity concepts in the forex market, or our video on YouTube if you’re unfamiliar with it and want to learn more:

For this exercise, you may stack onto the previous exercise by marking out both market structure and liquidity in the market without taking any trades and just observing how price moves as it grabs liquidity from certain levels, or targets it in a move!

Alternatively, you can practice marking out liquidity pools in the market alone and observe what prices do when they interact with those levels or zones where you presume there is an accumulation of liquidity sitting.

 

Supply & Demand Zone Exercise

The next exercise again is most pertinent to traders who use a supply and demand strategy, but if you trade support and resistance, you can sub that in for this strategy instead.

If you’re new to Phantom Trading’s strategy, or simply want to brush up on your skills, check out this helpful video on supply and demand zones on the Phantom YouTube channel:

Again, if you choose to you can stack the previous exercises together with the last two and all we’re going to do is simply mark out supply and demand zones as we bar replay through price action and to observe how price reacts (or doesn’t react) to the zones you’ve picked out. Again, no entering mock trades for this exercise either. It’s simply to build your skills up!

Market Direction Exercise

For our next exercise we’re going to focus solely on determining the direction of the market. For this one, it’s probably best to combine with the previous exercises. Again, we’re not placing trades quite yet, but we just want to observe the market structure, liquidity pools, and mark out supply and demand zones, and from there try to call the direction of the market on the timeframe we want to execute on (whether it’s the 15-minute chart, 5-minute chart, or 1-minute chart). 

Tracking Your Market Direction Accuracy

If you want to track your accuracy, you can take a simple notepad and pen, or open an excel sheet on the side and track how often the market moves in the direction you predict based on your analysis.

Usually, I want to pick a direction and minimum amount of movement (a low or high usually) to define whether or not the move happened. If the market simply ranges and fails to move in one direction or the other I just don’t count it. If it goes the opposite of the direction you predicted, tally it as invalid. If you accurately predict the direction and it moves significantly enough, tally it as valid. From here you can calculate your accuracy by dividing the number of “valid predictions” against the total number of predictions, multiplied by 100 to get your percentage accuracy.

Again this exercise gets some skin in the game without the complication of adding stop losses, entries, and targets quite yet. This is an amazing exercise for beginners who are trying to learn a new strategy they’re unfamiliar with, or new traders who are just getting into reading price action.

Standard Bar Replay Backtesting Exercise

Live Phantom Backtesting FX Replay Session Results From January 13, 2023

Finally, we have the standard bar replay exercise which effectively employed the four backtesting strategies I’ve outlined for you above. Now, there are a couple of ways to backtest doing bar replay, so let’s dig into it.

Method 1: Hindsight Bar Replay (Rewinding Allowed)

We recommend using this method early on as it is a lot more forgiving and can be helpful if you’re still in the early stages of learning a strategy. Much like doing end-of-day markups, simply play through price until you spot a setup and move that fits within your plan, rewind price, set and order , and watch price play out. You can also practice managing your trade with certain backtesting tools, which is great for honing your trade management skills too.

Method 2: Hardcore Bar Replay (No Rewinding)

Method 2 is best for seasoned traders with at least 3-6 months of trading at minimum, if not more, and isn’t for the faint of heart. This method of backtesting is extremely unforgiving much like the live market, but it also simulates the live market most realistically. Again, you’ll want to employ the previous exercises mentioned above (marking out market structure, liquidity, supply and demand zones, and deciding on a market direction or bias) before actually placing orders in your backtesting software.

From there, you can test the actual profitability of you executing whatever system or strategy you’re trading. You can also use this type of backtesting to stress test small adjustments to your trading strategy before bringing them into the live market, a process that I find myself constantly using.

Method 3: Hybrid Bar Replay (Rewinding Allowed Correcting Errors)

Finally, we have method 3 which allows rewinding in special conditions. It’s similar to hardcore backtesting where if you miss a trade, don’t rewind to take it, but if you make a small error in your entry (getting stopped out by a couple of ticks, or your limit order isn’t filled by a couple of ticks), or you make an error with managing your trade by say holding through spread hours or the weekend by accident, simply rewind and correct your errors.

Some Important Considerations When Backtesting

When backtesting, it’s important to emulate live market conditions as much as possible, so sticking to your risk rules, max loss per day rules, and sticking to the session(s) and chart timeframes you trade are important so you can more easily translate your backtesting into the live market.

It may even benefit you to practice hitting a simple 10% goal to simulate passing a funding challenge by testing one month of price action on the pair or financial instrument of your choice if that’s your goal.

Last but not least, it’s important to slow down and take your time so you can soak in what you’re learning. Rushing through price action isn’t going to make you a better trader, faster.

In fact, what I like to do is just backtest in short 20-30 minute sprints a couple of times a day to keep my edge sharp, much like a samurai would sharpen their sword.

Backtesting can have diminishing returns, so don’t overdo it! Focus on small incremental improvements and don’t make the mistake of overtraining.

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Robert Castillo – Currency & Commodities Trader,
Financial Analyst, Writer & Editor.

Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.