Backtesting Technical Indicators And Interpreting Historical Data

One of the best ways to test out technical indicators and test out how effective they really are to do some backtesting and look through historical price charts. However, this data can often be misleading.

I'm a regular forex trader and have traded the forex markets for a few years now, but despite being profitable overall, I still like to experiment with different indicators every so often and test out different systems that I come across on the internet.

However one thing I have noticed is that there is a huge difference between viewing historical data and thinking that an indicator or set of indicators seem to be extremely accurate and profitable, and making decisions based on these indicators in real time.

The main reason for this is because some indicators can be misleading and although they may appear profitable when viewing historical charts, in real time they can often give false signals or show up differently on historical charts when the current bar or candle is completed.

Technical indicators that give different signals and that can change in real time are often known as repainting indicators.

An example is the Supertrend indicator. This indicates whether there is a current a bullish trend in place (indicator is green) or a bearish trend (indicator is red). Now if you look at historical charts you can see that this signal shows pretty clear signals and changes in trend are clearly defined.

However when you view this indicator in real time you will often find that it changes color in the middle of a bar or candle, and for example, if it suddenly changes from red to green, you could take a long position, but the price could drop back and the Supertrend would go back to being red if it occurred in the same period.

However, if you looked back at this period of time at a later date you would only see that it remained red the whole time during this period and no change in trend took place. So this is one example of how a repainting indicator and how historical data in general does not always tell the real story of what actually happened.

So when you are analyzing historical charts and testing out different technical indicators and systems, always remember that when you come to trade these same indicators in real time, they are not always as reliable as they may seem to appear in historical charts. Also remember that it's easy to spot trends and patterns after the event but when you're trading it's a lot harder to do.

Source by James Woolley

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