How do you backtest FX strategies?

Discussion in 'Strategy Development' started by mizhael, Jul 21, 2010.

  1. Hi all,

    I keep getting confused. There are two ways I can trade, one is spot and the other is forwards.

    Trading spots and holding positions for more than a few days necessitate the need for adjusting for the carry effect.

    Trading forwards at a flexible time horizon necessitate the need for constructing a continuous contract with daily Mark-to-market.

    I suspect the above two constructed time series are the same. But I haven't thought thru yet.

    Anyway, after you have these constructed/stitched time series, you generate signals and run backtest on top of these time series. And then what really do you trade? Spots or forwards? Or doesn't matter?

    And then you calculate the PNL based on these constructed/stitched time series?

    Any thoughts? Please shed some lights on me on these!

    Thank you!
  2. 4EXJOE


    What system are you using to backtest?
  3. I test what I trade. I trade what I test.
  4. I am thinking of using TradeStation or MultiCharts, however I am stuck.
  5. This seems like a correct answer. The reason spot co-exists with derivatives in any market is that they are NOT the same. If they were, they wouldn't all be necessary.

    Point being, don't construct artificial data to trade on. Develop your system on a real product you can actually trade, and then trade what your system was developed on.
  6. 4EXJOE


    In my opinion, any robust strategy *should* work on both. However, it sounds like you have an inter-day strategy with longer term holding periods where you may need to account for carry interest in spot.

    One of the challenges with backtesting forex is finding reliable data, and then a platform to run the tests on.
  7. The two series are the same... Trade the one that's consistent with the carry assumptions that you're using to construct the series.
  8. Are Bloomberg data reliable enough? Or Reuters?

    And which platform would you recommend?
  9. h1l0


    Just a note: Some platforms have a special mode when testing forex compared to stocks.
  10. moscu


    I have used both but Tradestation the longest. I am looking to switch to MC because it seems to have the capabilities of using the bid/ask. The close price that TS uses is incorrect because there is not such thing in Spot forex. However I have not been able to use the MC replay feature. When I do the replay it does not plot the same as in real time. This might be me using it the wrong way. Another problem I have is I combined multiple strategies in a single strategy. So the EL code is fairly large and MC does not compile large EL code. This sucks because I have functions like look up tables that have 100's of line and they do not work in MC. I was also trying data from IB and TS at the same time and IB did not plot the correctly. The reason seems to be to the tick count (Volume) that been supplied or something like that. That's is what MC support told me.


    #10     Jul 30, 2010